Giving in to peer pressure

Skipton Building Society’s launch of a cash lifetime individual savings account (ISA) this month has made headlines; it’s the first such product to make it to market, despite the Government’s lifetime ISA regime coming into effect on 6 April. The shortage of products in the lifetime ISA sector is a reminder that Government enthusiasm for a savings vehicle is no guarantee that the savings and investment industry will embrace it immediately.

The innovative finance ISAs introduced in April 2016 are another example of this. Some 14 months after providers were given the green light to begin offering innovative ISAs, which are designed to shelter investments made on peer-to-peer (P2P) lending platforms from tax, fewer than 20 products have been launched. Moreover, not one of the three biggest P2P platforms, Funding Circle, Ratesetter and Zopa, has got an innovative finance ISA up and running yet.

One reason for the slow start has been hold-ups with the Financial Conduct Authority, which must sanction innovative finance ISAs before they are offered to the public; it has been working through a backlog of applications for clearance. But it’s also the case that ISAs just haven’t been a priority for the P2P platforms – in many cases, their businesses are already growing fast and they haven’t seen a clamour from their investors for ISA products.

All of which begs a question. If financial advisers and investors are attracted to the P2P sector, how do they best protect themselves from tax, given that some platforms are offering income yields in double figures? After all, for those with sizeable investments in P2P lending, such yields are likely to take them over their annual tax-free savings allowance, through which the first £500 and £1,000 of interest earned by higher-rate and basic-rate taxpayers respectively is free from tax.

The investment company industry provides one possible answer. Five or so closed-ended funds offer exposure to P2P lending of different types, offering professionally-managed portfolios of P2P investments and similar debt. Shares in each of these trusts are permissible holdings for a standard stocks and shares ISA, where the allowance this year is £20,000.

The potential for these funds to serve a very specific investor need is underlined by the success of a placing conducted by one debt-focused investment company, Honeycomb, this month. It has just picked up £105m in an over-subscribed fundraising, taking the total value of the fund to £300m.

It’s not difficult to understand why the fundraising was so popular. Honeycomb currently yields just shy of 9 per cent, which looks very attractive in these difficult times for income-focused investments.

It’s worth pointing out that Honeycomb’s portfolio isn’t P2P debt; rather it invests in consumer and small company debt via loan brokers, consumer credit providers and challenger banks. Nevertheless, it’s an investment vehicle offering exposure to very similar underlying assets to the P2P specialists, and sits alongside them in the debt sector.

Clearly, these funds aren’t suitable for every investor. But for those who think the P2P sector and similar vehicles may be a good option, particularly if they’re seeking income, the closed-ended fund industry offers two clear advantages: professionally-managed exposure to what can be a tricky asset class and straightforward access to the ISA regime to protect income from tax.