Peer-to-Peer lenders will pick up new tax breaks from April 2016 if they do their deals through new Innovative Finance ISAs.
The intention to offer tax breaks for peer-to-peer lending was first raised by Chancellor George Osborne in his Budget 2014, but has taken a long time to come to fruition.
Peer-to-peer lending – sometimes called P2P lending for short – is when a group of private lenders pool their cash and make a loan to an individual or business.
The deals are generally conducted through a P2P lending platform which matches lenders to borrowers and manages underwriting and collecting loan repayments.
Currently, P2P lending is excluded from share and cash ISAs unless carried out through a fund.
How will this affect expats?
Under ISA rules, UK taxpayers can open ISA accounts but non-residents cannot.
Expats who are still UK resident, such as those working abroad as contractors but keeping a home in the UK and expecting to return to live permanently in the country can open an ISA.
What is the P2P lending tax break?
New ISA rules will exempt loan repayments, interest and gains from peer-to-peer loans from tax
Will the Innovative Finance ISA has a separate cash limit?
No. Savers can put money in each type of ISA providing the overall ISA savings limit for the tax year is not breached – the limit for 2016-17 is £15,240 per taxpayer.
Why is the government allowing P2P lending ISAs?
The Chancellor has a policy of widening the availability of alternative finance, mainly for business.
This has included encouraging crowdfunding and investment in the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
His aim is to improve competition in the banking industry by making more sources of finance available, and in many cases, at a cheaper cost than that offered by the banks
Who will invest in P2P lending?
Research by the Yorkshire Building Society suggests more than 400,000 ISA savers were keen on expanding their investments into P2P lending.
The move is also likely to trigger more non-savers to open an ISA and one in four savers to put more money into an ISA with the likelihood of higher returns.
An earlier survey by the building society also pointed out that savers should have the risks of P2P lending explained in detail.