Today, the Chancellor Philip Hammond released his first budget. I’ve been through the key points to see what impact, intended or unintentional, it will have on the UK alternative finance sector. The short answer is, P2P Lending: not much, Crowdfunding: possibly negative.
Tax Free Dividend Cut
The amount of dividends an individual can claim before having to pay tax will fall from £5,000 to £2,000. Most (perhaps all) peer to peer lending platforms pay interest rather than dividends, but crowdfunding investors may be hit with the change.
Property Crowdfunding platforms like Property Moose or Property Partner pay a monthly dividend from rental payments paid by tenants. Let’s do a calculation on a 6% dividend yield, common on many a Property Moose investment description. Previously an investor could have held a £83,333 portfolio without having to pay tax. Now this will fall to £33,333. Capital gain from eventually selling the property for a higher price will not be affected by this change. Beyond the tax free dividend threshold, investors will have to pay 7.5%, 32.5% or 38.1% depending on their tax band (Basic, Higher, Upper). Even if this does not affect you directly, perhaps it might see a few other investors selling off their investments and reducing prices in the short term.
These crowdfunding platforms fall into a bit of a grey area. The government may feel that the new £20,000 ISA limit is generous enough for most private individuals looking to increase equity investments. However, at this moment very few platforms have jumped through all the regulatory hoops to offer their own Innovative Finance ISA products.
The Lifetime ISA
LISAs (Lifetime ISAs) will be launched on April 6th this year. These allow anyone under the age of 40 to invest £4,000 a year, to be matched with £1,000 by the government. The funds can only be used to buy a first time property or withdrawn on your 60th Birthday and have a 25% penalty for withdrawing beforehand. You can read a more detailed guide on MoneySavingExpert.
Unlike Help to Buy ISAs, you can invest in Stocks and Shares with a LISA and in theory should be able to include Innovative Finance ISA investments. For young savers hoping to buy within a few years, less volatile peer to peer lending investments like Landbay or Lending Work’s IF ISA’s could be very appealing. We’ll have to wait for more details before confirmation on the IFISA/LISA compatibility.
A useful tip for young savers who want to use a LISA to buy a first home: you need to have the LISA account open for a year before you can use it to buy a house. So, MoneySavingExpert suggests just to open one with a £1 investment on April 6th to kick start the process early!
What Was Missing
The CEO of Assetz Capital, Stuart Law picked up on a great point in an email to investors shortly after the budget was released. Speaking on the Innovative Finance ISA, he said:
Hammond has missed a chance to take a fatal flaw out of the Innovative Finance ISA that prevents investors investing across multiple P2P platforms in the same tax year – leaving investment diversification very difficult for people.