Policy paper

Income Tax: Innovative Finance Individual Savings Account and peer to peer loans

Published 8 December 2015

Who is likely to be affected

Individuals making peer to peer loans and peer to peer lending platforms.

General description of the measure

From 6 April 2016, interest and gains from peer to peer loans will qualify for tax advantages where these loans are made through a new type of Individual Savings Account (ISA), the Innovative Finance ISA.

Policy objective

To increase the choice and flexibility available to ISA investors, encourage the growth of peer to peer lending and improve competition in the banking sector by diversifying the available sources of finance.

Background to the measure

At Budget 2014, the Chancellor announced that peer to peer loans would become ISA qualifying investments. HM Treasury consulted on implementation of this measure between 17 October and 12 December 2014. HM Treasury’s response to this consultation, confirming that peer to peer loans would be eligible for a new type of ISA (the Innovative Finance ISA), was published at Summer Budget 2015.

Detailed proposal

Operative date

The measure will have effect for qualifying peer to peer loans made on and after 6 April 2016.

Current law

The account rules for ISA are set out in the Individual Savings Account Regulations 1998 (SI 1998/1870) (ISA Regulations). There are currently two types of ISA – cash ISA and stocks and shares ISA. The ISA Regulations specify which investments qualify for each of these accounts. Peer to peer 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 HM Revenue and Customs (HMRC). These regulations also specify other rules and features of ISA, including those concerning the ownership, transfer and withdrawal of ISA investments.

Proposed revisions

The ISA Regulations will be amended by secondary legislation to establish a third ISA type – the Innovative Finance ISA. This account 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.

Peer to peer 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.

Summary of impacts

Exchequer impact (£m)

2015 to 2016 2016 to 2017 2017 to 2018 2018 to 2019
negligible -10 -20 -35

These figures are set out in Table 2.1 of Budget 2014 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2014.

Economic impact

The measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

The changes to the ISA rules mean that new tax advantages will be available for individuals who make peer to peer loans. These changes will increase the choice available to ISA investors and could also increase access to alternative finance options for some borrowers. No individual will face additional tax costs as a result of this change. The measure is not expected to affect family formation, stability or breakdown.

Equalities impacts

Data provided by peer to peer lending platforms indicates that around 80% of lenders are male. Although the tax-advantaged nature of ISA returns generally means gains are greater for higher rate taxpayers than basic rate taxpayers, industry data indicates that most gainers from this change could be basic rate taxpayers, who are assumed to have more room available within their ISA allowance. It is anticipated that the main risks of this policy are those associated with peer to peer lending (loan-based crowdfunding) more generally. The FCA has identified these as including potential risks for the following groups with protected characteristics:

  • those with learning difficulties or cognitive limitations, who may have limited capacity to understand fully the risks associated with loan-based crowdfunding
  • individuals approaching retirement and considering their options under the new pension freedoms, who may choose to invest in loan-based crowdfunding, failing to realise it is a much higher-risk alternative to buying an annuity
  • individuals in retirement, who may have significant sums in savings and may be concerned about low interest rates. This may lead them to search for higher yields elsewhere, which in turn may lead them to invest significant amounts in loan-based crowdfunding platforms, potentially taking inappropriate levels of risk with their money
  • young and inexperienced investors, who may be attracted to the concept without a full understanding of the risks involved, especially in the web-based and ‘social-networking’ environment of crowdfunding

To mitigate these risks, FCA proposes to focus in particular on the quality of disclosure, including financial promotions, to ensure that risks are adequately disclosed, and will continue to consider the equality and diversity impacts in this area.

Impact on business including civil society organisations

These changes will impact upon those peer to peer lending platforms that have full FCA regulatory permission and choose to become ISA providers. It will largely be a commercial decision for each one whether or not they wish to offer ISA.

The changes are expected to increase business for those platforms that do offer ISA, by allowing new tax advantages for the loans they facilitate. Any platform offering ISA will be required to meet the general requirements that apply to all ISA providers. They are therefore likely to face set-up expenses, including those arising from the development of new systems for account opening and reporting to HMRC. However, the overall set-up cost for businesses is expected to be negligible.

The ongoing costs to a platform of being an ISA provider will include those associated with processing ISA subscriptions and customer instructions in relation to transfers and withdrawals of cash, as well as reporting ISA information to HMRC. However, the annual ongoing cost of complying with the ISA Regulations is expected to be negligible.

Beyond these core requirements of complying with the ISA Regulations, some peer to peer lending platforms have told us that they will incur additional costs – such as those relating to employment of legal specialists and other staff, as well as expenses from marketing ISA products. These additional costs are expected to vary significantly between different businesses. More generally however, it is expected that making peer to peer loans eligible for ISA could make this type of lending more attractive, and could increase some businesses’ access to alternative finance options.

Operational impact (£m) (HMRC or other)

The cost to HMRC of implementing this change is not expected to be significant.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

All aspects of ISA are subject to ongoing review through compliance work and monitoring of ISA information submitted by account providers.

Further advice

If you have any questions about this change, please contact Simon Turner on Telephone: 03000 546588 or at savings.audit@hmrc.gsi.gov.uk.

Declaration

David Gauke MP, Financial Secretary to the Treasury, has read this Tax Information and Impact Note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.