The budget yesterday carried one absolute jewel, namely that an ‘Innovative Finance ISA’ will be launched next year in time for April. With the following hallowed words Mr Osborne has transformed crowdfunding: ‘The Government will introduce the innovative
finance ISA, for loans arranged via a P2P platform, from 6 April 2016 and has published a public consultation on whether to extend the list of ISA eligible investments to include debt securities and equity offered via a crowd funding platform'. Why does this
matter? Well, for the first time, peer-to-peer lending to businesses will be sheltered from tax. And that’s not all. Also included are all other investment-based crowdfunded products; equity, debentures and peer-to-peer consumer.
The budget indicates that this will take place from April 2016, with crowdfunders being able to save using the new ‘Innovative Finance ISA’. The crowdfunding industry has long asked for a separate ISA, one which is not treated as the same asset class as
the renowned and respected Cash ISA, or even to the more complex Stocks and Shares ISA. It is obvious that P2P lending has its very own risk and reward profile, and consumers need to understand these nuances. This is exactly why having a separate crowdfunding
ISA is so important. This was at first expected to focus on peer-to-peer lending only, however this news that the ISA will cover every crowdfunding area is a bombshell. There’s a new saving scheme in town, and we’re coining it the crowdISA.
Who will start using the crowdISA?
There is a survey by the esteemed P2P Association bouncing around which suggests that 62% of British savers would consider using crowdfunding as a mechanism to get returns. They would however need their returns to be tax free, something that should take
place next year. In effect this idea of alternative finance being ‘alternative’ is about to change. With the incoming crowdISA there is swiftly becoming very little ‘alternative’ about this sector. Crowdfunding will go massively mainstream.
5 reasons why this matters
- Well firstly it will enable helping savers and investors choose how they make the most of their funds. Once an individual properly understands risks, personal choice in personal finance should be something everyone aspires to have.
- The new crowdISA would help retail consumers choose how they use their tax-free savings pot each year, allocating up to their £15,240 annual limit.
- If even a fraction of the circa £400bn+ of funds held by ISAs enter into the realm of crowdfunding, then we are looking at a truly monumental step in the development market, one will only help crowdfunding become a more mainstream choice for consumers.
- Savers broadly understand what ISAs are. The entry of crowdfunding into the big savings tool will transform the public’s awareness of crowdfunding. More investors will enter the market as a consequence, as will SMEs. It’s a true win-win for the sector.
- The crowdISA will further demonstrate how the UK is leading the world of fintech, innovation and alternative finance.
How will this impact the crowdfunding industry?
It is safe to say that this will spark a major growth spurt for the crowdfunding sector. The crowdISA would opening up choice for savers, reinvigorate the ISA market and give savers a higher return on their investments, all while allowing balanced diversification
to take place through lending across 100s of different sites and companies. With savers also not paying tax on any returns, the rates crowdfunding can give will start to look even more attractive. Now bear in mind that figure we stated earlier that 62% of
savers would consider using a crowdISA, that’s a huge game-changer for this industry. Money.co.uk recently discovered only 6% of savers had used peer-to-peer, showing the massive opportunity just waiting to be tapped. Crowdfunding may just be growing up.
What should interested investors remember?
There are great returns to be made through crowdfunding, however savers should not be tempted by attention grabbing interest rates. Instead a policy of diversification across crowdfunding sites, asset types and businesses is ultra-necessary. It is likely
that the crowdISA will initially be used by those more comfortable and understanding of the risks involved.