From 6 April 2016, a new type of Individual Savings Account (ISA) will be launched the Innovative Finance ISA. This new ISA will be able to hold peer-to-peer (P2P) loans, which often pay significantly higher returns than cash accounts.
Broadly, P2P lenders act as middlemen by matching people who wish to invest cash with those who want to borrow money. From 6 April 2016, interest and gains from P2P loans will qualify for tax advantages where these loans are made through an Innovative Finance ISA.
There are currently two types of ISA:
- Cash ISA
- Stocks and shares ISA.
The ISA Regulations specify which investments qualify for each of these accounts. P2P loans are currently not eligible for either type of ISA, other than where they are included within an investment trust or similar product that is eligible to be held within a stocks and shares ISA. The ISA Regulations also set out which financial institutions can offer ISAs, and specify the information that ISA providers must supply to HMRC. These regulations also specify other rules and features of an ISA, including those concerning the ownership, transfer and withdrawal of ISA investments. The ISA Regulations will be amended by secondary legislation to establish this third ISA type (Innovative Finance ISA). Accounts will be available to investors aged 18 or over. Along with loan repayments, interest and gains from peer to peer loans will be eligible to be held within this new type of ISA, without being subject to tax.
P2P lending platforms with full regulatory permissions from the Financial Conduct Authority (FCA) will be eligible to offer the Innovative Finance ISA in accordance with the ISA Regulations. Like other ISA providers, these platforms will be required to supply HMRC with certain information about the accounts they provide. Various account requirements set out in the ISA Regulations will be updated or modified to accommodate the Innovative Finance ISA.
As a result of these changes, an ISA investor will be entitled to subscribe new money each year to a maximum of one Innovative Finance ISA, one cash ISA and one stocks and shares ISA. The amount of new money paid into all of the ISAs held by an investor must not exceed the overall ISA subscription limit for the year.
For further information, see the GOV.UK website at www.gov.uk/government/publications/income-tax-innovative-finance-individual-savings-account-and-peer-to-peer-loans/income-tax-innovative-finance-individual-savings-account-and-peer-to-peer-loans.