Innovative finance ISA now available for tax-free peer-to-peer lending investments.
Investing in Peer-to-Peer Lending Now Tax-Free

The FCA (Financial Conduct Authority) has authorised eight lenders to offer peer-to-peer lending within an ISA wrapper - with another 86 waiting in the wings. The new 'Innovative Finance ISAs' will allow up to £15,240 to be invested into lending through the peer-to-peer services this year.

With the generally low interest rates offered to savers the peer-to-peer lending market is there to bridge savers searching for better returns and borrowers looking for lower rates of interest. For investors it is a good deal as the return for lending to someone with a good credit profile can be as high as 4 percent, and some on with reasonable credit paying interest at 6 percent.

Lending to someone at 6 percent and utilising the entire ISA limit of £15,240 would net a return of over £900 in interest - or around £75 per month. From next year, 2017 the ISA limit will be raised to £20,000 so the return could be £100 per month.

The ISA benefit is losing its gloss a little due to the introduction of the personal savings allowance - which for basic rate taxpayer means no tax on interest of up to £1,000 earned. So looking at the above example an individual could invest in peer-to-peer lending up to £16,500 and still pay no tax on the interest earned. However, for those with more to invest, the ISA can be used in combination with non-ISA investment.

There are downsides as the Financial Service Compensation Scheme (FSCS) does not apply to these types of investments so if the borrower defaults there is no recourse. Normally up to £75,000 is covered should a bank etc go bust.

Peer-to-Peer lenders however do split up amounts invested amongst large amounts of borrowers in units so that if one individual defaults all of the investment is not lost. There are also insurance options available.

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