Wednesday, 24 June 2015

Peer to peer lending

If you are a saver, no doubt you will have noticed that interest rates have been on a downward trajectory for some time. This is due largely to the Bank of England base rate having been kept at a dire 0.5% since 2009. While there is talk of the base rate being raised later this year, you may be wondering if there is any way to get a better rate of return on your hard-earned money.

Enter peer-to-peer lending. A fairly recent development in the business world, the idea is that businesses and individuals lend to other businesses through an intermediary, who vets each loan request and takes a small cut in fees. This process does away with the need to approach banks and often results in a more favourable rate for both lender and borrower than they would otherwise have achieved.

For example, Funding Circle, a peer-to-peer lender that was set up in 2010, currently boasts an average all-time return on investment of 6.6% (after fees and bad debts but before tax). You would be hard pushed to find such a high rate of return on a regular savings account at the moment.

However, there are drawbacks to consider. Peer-to-peer lending is riskier than a simple savings account because you are lending to businesses and you therefore have the risk of them defaulting on the loan. However, most peer-to-peer providers grade each borrower based on their prior financial performance so lenders can assess how risky each investment may be.

In addition, the Financial Services Compensation Scheme, which covers savings accounts of up to £85,000, does not cover peer-to-peer lending.

If you do decide to do some investing through a peer-to-peer lender, you will need to inform HM Revenue & Customs of any interest that you receive for each tax year because, unlike savings account interest, it is not taxed at source. If you are unlucky enough to experience any losses, the silver lining is that you from April 2015 you will be able to offset these against any other peer-to-peer income you received for tax purposes. In addition, plans were announced last year to include peer-to-peer lending interest in the tax-free ISA allowance, although there are no details on the timeframe yet.

So if you are prepared for the risks, peer-to-peer lending can be an attractive investment prospect, with the possibility of earning good rates of return and the added feel-good factor of investing in UK businesses. Talk to us today for more information.

Liz Simpson of Adders Accountants

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