City regulators have granted approval to several new ISA wrappers that allow tax-free peer-to-peer lending.
Peer-to-peer lending (P2P) lets investors pool their cash to earn more interest than many traditional savings offers.
New innovative finance ISAs let investors lend up to £20,000 a year – although the ISA limit can be spread over the three types – innovative finance, stocks and shares or cash in any ratio as long as the total does not exceed the £20,000 cap.
Expats cannot open an ISA – investors must be UK resident, but the scheme is open to Crown employees serving overseas.
Investors can transfer cash already in ISAs into a new innovative finance ISA, providing any investments are cashed in and the transfer cash does not exceed the annual ISAS limit.
How innovative ISAs work
Likewise, cash can be switched between innovative finance ISAs.
Although P2P lenders are regulated by the Financial Conduct Authority, lending through a platform is not covered by the Financial Services Compensation Scheme (FSCS).
If a borrower fails to repay a loan, the platform will try to recover the money with interest and costs, but the risk is lenders could lose all their money.
Rates of return depend on the platform, amount advanced and type of customer.
The Funding Circle headline rate has average 7.3% in 2017, while those for the other big three platforms are lower – Zopa averages 6.2% and RateSetter around 4.8%.
The highest rate was offered by rebuilding society – 18.1%, while the lowest was an average 2.2% from Wellesly & Co.
Rates and lenders
Currently, 21 platforms offer P2P loans, but the total industry borrowing ranges from more than £21.3 billion with Zopa and Funding Circle to £10 million with smaller platforms.
Around nine platforms offer ISAs, with a queue waiting for authorisation from the FCA.
Interest rates range from 5.43% with Crowdstacker to 12% with LandInvest.
Industry figures suggest around 170,000 active P2P lenders are signed up with platforms.
Analysts Orca Money have started a P2P lender comparison service to help investors decide which platform to go with.
“Our platform therefore aims to provide compliant, credible and robust P2P data and analytics, similarly to what’s available for equity or fixed income investments, to empower investors and financial advisors when opting for P2P,” said a spokesman.