Peer To Peer Lending: Earning Interest Tax-Free

With the introduction of the Lifetime ISA (LISA) for 18-39 year olds as of April 6, 2017, the Innovative Finance ISA (IFISA) is no longer the baby of the ISA family for peer to peer lending. However, it’s still the least understood with regards to general savings and investment options.

The IFISA enables access to alternative finance earnings in the form of both peer-to-peer advances or debt-based securities such as crowd bonds. Since these kinds of investments involve more risk, they offer the potential for significantly higher revenues – usually within the range of 3% to 7% per year over a short to medium term.

If you are happy to take on the higher risk that comes with putting resources into peer-to-peer loans and crowd bonds, the IFISA could, in this manner, prove an appealing alternative. And because they are mostly illiquid and held for a fixed term they are not vulnerable to the short-term volatility that comes with contributing through a stocks and shares ISA.

Finding new and varied investment opportunities to improve the tax efficiency of your venture portfolio has turned out to be more of a challenge resulting from the recent changes to pension legislation and additional restrictions on Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) qualifying investments. Subsequently, high earners should ensure they maximise the tax wrappers offered to them.

Is the usual 0.5% to 1% return on savings the best use of your ISA wrapper or are you better paying tax on that and securing a potential 5% or 6% yearly return from your lending?

Some terminologies surrounding the IFISA and its related ventures can be puzzling, yet the primary thing to be sure about is that an IFISA can only hold peer-to-peer advances and debt-based investments. Not any equity investments.

While peer-to-peer lending is naturally more diversified, with the platforms generally picking the loans for you, debt-based ventures, also known as crowd bonds, tend to concentrate on a few bigger investment opportunities.

Even though these bring single investment risk, they should let the platforms take a more systematic approach to due diligence. The offer data for every opportunity summarises all the information an investor should need to understand the offer, the risks and charges included, and the due diligence undertaken. It must be an open and transparent procedure that should suit investors who nowadays insist on transparency and control.

The yearly ISA allowance is currently £20,000 and there are no restriction on transfers of your existing ISAs from preceding years. Thus, for those hoping to expand the diversification of ISA portfolios and capitalise on assets uncorrelated to the stock market, the IFISA is surely worth considering if investors recognise the risks involved and are willing to take them.

Please be clear that all peer to peer lending products and equity based crowdfunding platforms carry a level of risk though P2P lending is deemed a more secure and have less risk than the latter. In all cases, careful research should be carried out before making any investment and that you have assessed your personal risk to reward ratios too and have a balance spread of a diversified portfolio.