Could You Use Debt to Boost Your ISA?

How would you feel about investing money by lending it to somebody else? How would you feel if you could do so as part of your tax-free ISA allowance?

Because that’s what the government is asking right now, as it consults on how to make major changes to tax-free savings and investments.

A recent major reform of ISAs already means that you can now save up to £15,000 a year into a tax-free account, either in cash or stocks and shares, or a mixture of both. But our leaders want to go even further and allow savers to include peer-to-peer lending in the pot of stuff the taxman can’t touch.

It’s consulting right now on whether that should be within a standard ISA or if a new ISA product needs to be created.

What is peer-to-peer lending?

If this is new to you, it probably won’t be for long. Peer-to-peer lending — essentially lending without the need for a bank — is a massive growth industry, with high demand among would-be lenders and borrowers.

It works by individuals lending money to other individuals via dedicated websites, often receiving higher returns than they would get if their money simply sat in the bank. Of course, as with stocks and shares, there’s a risk and lenders could lose their money if a borrower doesn’t repay a loan.

The sector has been growing at more than 100% a year and more than £1.6 billion has been lent this way to date.

Right now, lenders pay tax on the money they earn in interest, but once these loans are available within ISAs they’ll be able to protect some or all of their investments from the taxman.

Why would the government want to do that?

The peer-to-peer lending industry might be seeing massive growth but it’s still relatively unknown. Including it in ISA savings is likely to see it snowball and provide a major alternative source of lending.

And that is clearly a major reason why the government is interested in doing it. As a spokesperson said:

“Allowing P2P loans to be held in ISAs will provide greater choice to ISA investors, and will support the government’s aim to diversify the different sources of finance that are available to borrowers by encouraging the growth of the P2P lending sector.“

So is everything rosy?

Not everyone thinks this is a good idea. At the moment, peer-to-peer lending isn’t protected by the Financial Services Compensation Scheme, making it essential that lenders understand the risks.

Some analysts have also argued that a huge influx of cash into the peer-to-peer lending pot will cause issues by potentially lowering lending standards.