We have known for some time that a new Innovative Finance ISA (IFISA) will become available from April 2016 to accommodate Peer-to-Peer (P2P) loans. Investors will be able to allocate their entire ISA allowance (£15,240) in any way they like across IF, Cash or Stocks & Shares ISAs. I’ve been nervous about this for some time because I don’t feel this is the right time to confer the level of respectability that is associated with ISAs to what is still a relatively new type of investment, untested through a full economic cycle.
We know that default rates on loans will increase in a recession but we don’t know how much that will affect a typical book of P2P loans yet. Moreover, we don’t know how the collapse of one of the P2P platforms might affect investors.
The prospect of a tax benefit for P2P loans has understandably made the Crowdfunding platforms ask for similar treatment and in the Spending Review George Osborne has confirmed that debts issued through these platforms will also be eligible for IFISAs (but not until April 2017). This alarms me even more.
Virtually all Crowdfunding offers are based on early stage ventures and some of the platforms carry out only minimal due diligence. Although the early reports on performance have been quite encouraging (Source: AltFi), it’s still early days. At the very least, I hope that this type of investment is only eligible via a ‘fund’ type structure which ensures that investors get adequate diversification.
I’m all in favour of encouraging innovative ways of raising capital for businesses directly from the public. Potentially this lowers the cost of capital and increases public awareness of business which is laudable. However the Government has already introduced a new tax free allowance of £1,000 (for Basic Rate taxpayers) in respect of interest income (which includes P2P loans). That should suffice for about £20,000 of investment. I just don’t see the need to muddy the ISA waters, which currently are pleasingly clear.