Peer-to-peer lending is the type of non-conventional lending in which no financial institution is involved in a lending deal between a lender and a borrower. In 2005, Zopa, a UK-based company, first started providing peer-to-peer investment services. To make Peer-to-Peer investment tax-free, one needs to invest in an innovative finance ISA(IFIS). Innovative Finance ISA(IFISA) was first introduced on 6 April 2016.
But due to the global recession of 2008-2009, it couldn’t get any recognition. And after that, it grew exponentially. Now, most investors take advantage of it for personal needs, establishing and maintaining small businesses, and crowdfunding for mega projects.
Since no intermediary financial institution is involved, the investor doesn’t need to pay the borrower finding fee, registration fee, legal and other fees. Thus, the borrower gets maximum returns.
This means that the lender needs to sign up and make his money available for lending. This online nature makes it easily accessible for all potential investors and facilitates speedy investment application submission.
Upon approval, the investor can transfer his money to the platform and make it available for all the prospective borrowers. This would take hardly one to two days which is comparatively quite fast concerning other mainstream traditional banks and credit unions’ lending process.
These Investment platforms allow investors to lend their money to any borrower of their choice. Additionally, investors and borrowers can mutually decide terms and conditions. Furthermore, such platforms provide investors with financial management services using which an investor can further reinvest his returns, thus maximizes his profits.
The interest earned from Peer-to-Peer investments usually adds up to the investor’s salary or self-employed income. And this makes the investor liable to pay income tax after you hit a certain income. For example, in the UK, an investor could pay up to 20% to 45% tax depending upon the tax scale he falls into.
Innovative Finance ISA – IFISA
For tax-free Peer-to-Peer investment, one needs to invest in an innovative finance ISA(IFIS). Finance IFISA was first introduced on 6 April 2016.
IFISA was explicitly designed for peer-to-peer lending, which makes an investor earn interest within a tax-free wrapper. This shows that any interest earned under IFISA will not be taxed and would not be counted into your personal saving allowance.
However, there is a ceiling limit to your interest, and you can contribute each year to IFISA. This annual IFISA limit for the year 2020 has been set to £20,000. This means that you can’t invest your interest in worth more than £20,000 for 2020. You can invest your interest in the amount mentioned above in a single IFISA or spread it across different IFISAs.
Furthermore, one could transfer his existing innovative finance ISA into another IFISA as well. However, your previous year’s savings won’t be shown on the next year’s annual saving allowance.
Thus, you can increase your total investments, and this will allow you to maximize your returns. Interest rates for IFISA are comparatively higher than other ISAs, which means you can earn more interest.
Many providers are offering IFIS in the marketplace. However, all these providers need to be authorized by Financial Conduct Authority (FCA), UK.
All these providers are allowed to provide loans under the set rules and regulations of FCA TO businesses, consumers, and developments. And all the returns are tax-free under the wrapper of IFISA.
Under IFISA, an investor enjoys more diversification. Since this market is growing each day, an investor may enjoy more investment options.
Additionally, FCA ensures the protection of the rights of both the lender and the borrower. Furthermore, FCA makes sure that the providers are fully complying with the rules and regulations and quality of the financial products is not being compromised. In case of any violations, the violator will face legal action under FCA legal framework.
Peer-to-Peer investment is lucrative, easily accessible, flexible, and speedy than other mainstream banks and credit unions. One can earn returns weekly or monthly and if desired, can further reinvest them and maximize his profits.
Conversely, all these profits earned could make the investor pay tax after reaching a certain income threshold. Consequently, paying these taxes, one may not earn expected profits. IFISA is specifically designed to entertain Peer-to-Peer investors.
Under its tax-free wrapper, up to £20,000, you are not liable to pay taxes anymore. If you are interested in investing money in Peer-to-Peer investment, don’t forget to subscribe to the IFISA policy.
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Image by Steve Buissinne
