Her Majesty (HM) Treasury has announced that as of July 1st, 2014 peer-to-peer lending is being given tax discounts for the first time in UK history. The radical reformation will take place within the Individual Savings Account (ISA) system.
The annual investment allowance limit has been raised from £5,760 (cash ISA) and £11,420 (stocks and shares ISA) to £15,000 in the form of cash ISA, shares or stocks ISA, or in combination, without lenders having to pay tax on their capital gains. Furthermore, all restrictions based around maturity dates of securities will be relinquished. This scheme will be known as the New ISA (NISA)
This provides an opportunity for around half of UK adult ISA holders to have greater provisions on how they determine to save and invest. Approximately 5 million people will benefit from the allowance increase as they are already investing at the £5,760 limit. The NISA reform will expect a sharp rise in investors joining the game on peer-to-peer lending platforms. Therefore, peer-to-peer platforms may expect accelerated growth within the industry and must thereby adjust their capacity to cope with high volumes of lending.
According to Rhydian Lewis, “the first step will be peer-to-peer platforms offering ISAs directly to savers. The industry is keen to do that so it can keep a direct relationship with savers.”
NISA’s tax benefits are as follows according to Investingfunds.org:
· “Higher rate taxpayers do not have to pay an extra 25% income tax on dividends that they would have to pay outside an ISA.
· Additional rate taxpayers do not have to pay an extra 30.55% income tax on dividends that they would have to pay outside an ISA.
· If you hold corporate bonds or bond funds within an ISA that pay out interest distributions you will be entitled to receive the interest gross or reclaim the savings tax of 20%.
· There will be a charge of 20% on interest earned on cash held in a stocks and shares ISA. However, higher rate and additional rate taxpayers, who would otherwise pay 40% and 45% income tax respectively outside an ISA, would not have any further tax liability.
· There is no Capital Gains Tax (CGT) on any gains made from an investment held within an ISA. However, you cannot offset any losses from your ISA investment against any gains made from non-ISA investments in order to reduce any CGT owed.”
The reform is an attempt to satisfy the increased scrutiny of the peer-to-peer lending sector. Investors have been demanding greater sovereignty on how and where they save and invest their money. Individuals and businesses seek to borrow and lend at favourable rates and bypass banks that are either not lending or lending at disadvantageous interest rates.
Investors should beware that the Financial Services Compensations Scheme is not currently protecting investors’ monies. Therefore there is greater risk, which may be reduced through a diversified investment portfolio. Some peer-to-peer lending sites already offer forms of protection schemes, such as provision funds, in order to protect lenders from bad debt.
The government will be closely monitoring the impact the announced change has on the sector in the coming months and will continue to consider further debt securities to be offered by crowdfunding platforms. At the end of 2013, over £1bn was invested; the sector has already more than doubled in size, providing a positive outlook on the sector as it is becoming a more mainstream method of financing and has great potential for growth and expansion.
References:
Goff, S. (2014) Budget 2014:Peer-to-peer lending allowed for Isas. Ft.com
HM Treasury. (4014) Budget 2014. Gov.uk
Winch, J. (2014) How an 8pc peer-to-peer Isa could work. Telegraph.co.uk
(2014) Tax benefits of stocks and shares ISAs. Investingfunds.org
Image credit to: @Doug88888. http://bit.ly/1fRYSJQ
This provides an opportunity for around half of UK adult ISA holders to have greater provisions on how they determine to save and invest. Approximately 5 million people will benefit from the allowance increase as they are already investing at the £5,760 limit. The NISA reform will expect a sharp rise in investors joining the game on peer-to-peer lending platforms. Therefore, peer-to-peer platforms may expect accelerated growth within the industry and must thereby adjust their capacity to cope with high volumes of lending.
According to Rhydian Lewis, “the first step will be peer-to-peer platforms offering ISAs directly to savers. The industry is keen to do that so it can keep a direct relationship with savers.”
NISA’s tax benefits are as follows according to Investingfunds.org:
· “Higher rate taxpayers do not have to pay an extra 25% income tax on dividends that they would have to pay outside an ISA.
· Additional rate taxpayers do not have to pay an extra 30.55% income tax on dividends that they would have to pay outside an ISA.
· If you hold corporate bonds or bond funds within an ISA that pay out interest distributions you will be entitled to receive the interest gross or reclaim the savings tax of 20%.
· There will be a charge of 20% on interest earned on cash held in a stocks and shares ISA. However, higher rate and additional rate taxpayers, who would otherwise pay 40% and 45% income tax respectively outside an ISA, would not have any further tax liability.
· There is no Capital Gains Tax (CGT) on any gains made from an investment held within an ISA. However, you cannot offset any losses from your ISA investment against any gains made from non-ISA investments in order to reduce any CGT owed.”
The reform is an attempt to satisfy the increased scrutiny of the peer-to-peer lending sector. Investors have been demanding greater sovereignty on how and where they save and invest their money. Individuals and businesses seek to borrow and lend at favourable rates and bypass banks that are either not lending or lending at disadvantageous interest rates.
Investors should beware that the Financial Services Compensations Scheme is not currently protecting investors’ monies. Therefore there is greater risk, which may be reduced through a diversified investment portfolio. Some peer-to-peer lending sites already offer forms of protection schemes, such as provision funds, in order to protect lenders from bad debt.
The government will be closely monitoring the impact the announced change has on the sector in the coming months and will continue to consider further debt securities to be offered by crowdfunding platforms. At the end of 2013, over £1bn was invested; the sector has already more than doubled in size, providing a positive outlook on the sector as it is becoming a more mainstream method of financing and has great potential for growth and expansion.
References:
Goff, S. (2014) Budget 2014:Peer-to-peer lending allowed for Isas. Ft.com
HM Treasury. (4014) Budget 2014. Gov.uk
Winch, J. (2014) How an 8pc peer-to-peer Isa could work. Telegraph.co.uk
(2014) Tax benefits of stocks and shares ISAs. Investingfunds.org
Image credit to: @Doug88888. http://bit.ly/1fRYSJQ
About the author - Jasmien Cels
Jasmien is currently studying a bachelors in Business Studies from Cass Business School in London while interning at Crowd Valley. Originally from Belgium, she grew up in Switzerland, Ethiopia, USA, and Japan.
She is very passionate about the start-ups, entrepreneurship, technology, and travelling; she aspires to one day become an entrepreneur.
Jasmien is currently studying a bachelors in Business Studies from Cass Business School in London while interning at Crowd Valley. Originally from Belgium, she grew up in Switzerland, Ethiopia, USA, and Japan.
She is very passionate about the start-ups, entrepreneurship, technology, and travelling; she aspires to one day become an entrepreneur.
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