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Amongst the clamour of the backlashers responding to George Osborne’s latest attempt to reduce the UK’s budget deficit, there was some welcome news for those investing in P2P Lending and for the P2P industry. The new Innovative Finance ISA will allow current and future investors to earn interest from P2P loans free of tax from April 2016.

Many see this as the government effectively rubber-stamping the legitimacy of the industry by offering conventional investors another reputable channel they can invest through. This will incentivise investors who may be put off by the risk involved in a Stocks and Shares ISA, but aim to earn more interest than they would receive from a cash ISA. Osborne hopes that thousands of new jobs will be created by helping SMEs to grow, which will subsequently help to haul down a budget deficit that he has already reduced from 10.2% of GDP to 5%.

Around 20 million adults in the UK have an ISA; if a fraction of those investors chose to invest their money in an Innovative Finance ISA it would create a huge supply of new lenders available to SMEs. However, the new law will be introduced after the start of the next tax year; it may take until 2017 for alternative finance platforms to on board the wave of new investors encouraged by the Innovative Finance ISA. Moreover, investors will need to be aware that they need to be proactive with their money. Alternative finance companies are unlikely to be able to pay interest on a lump sum as is done by banks handling a cash ISA. Instead, investors will need to gradually lend to a range of companies throughout the lifespan of the ISA. If not, the alternative finance industry will struggle to fund large one off interest payments when demand for borrowing is spread out over the entire year.

The complex nomenclature that differentiates debt and equity lending has been taken into account with the “Innovative Finance” umbrella term; it successfully covers the various alternative finance spheres as well as allowing any investors in future niche P2P lending spin-offs to reap the benefits of a tax free ISA. We will endeavour to decode some more of the complex terminology used in the world of alternative finance in another blog.