While George Osborne’s recent Summer budget provoked a variety of emotions in the public – disbelief and anger, mainly – there is likely to be one welcome addition, especially for the alternative finance sector: the Innovative Finance ISA.

As E-Car Club becomes the first crowdfunded company to pay back investors, now seemed the right time for Osborne to give an official nod to alternative finance methods. The new type of ISA will extend the usual list of tax-free ISA investments to include peer-to-peer lending to businesses from 6th April 2016. A consultation will also take place as to whether the ISA should extend to debt and equity crowdfunding investments. Essentially, it allows investors to put money into new companies and reap the rewards – tax-free.

ISA investors will have the ability to set up an Innovative Finance ISA through peer-to-peer lending platforms like LendingCrowd. Clearly, it is a move by Osborne to encourage people to invest in SMEs. By boosting and growing small businesses, there is the hope that thousands of new jobs will be created, which will subsequently help to haul down a budget deficit that he has already reduced from 10.2% of GDP to 5%. It is also another sign of the government recognising the benefits of an industry that continues to grow by 400% each year.

Whilst on the surface this looks like a good idea, there are however some concerns over underlying issues.

For the most part, peer-to-peer lending opportunities are tailored to sophisticated investors with wealth to deploy – which is very different to the primary audience at which ISAs are aimed. They are traditionally used to encourage ordinary people to save for the future.

Furthermore, most equity-based crowdfunding investments already qualify for tax relief that is far more generous than what is on offer via ISAs. The majority of fundraisings are eligible for the enterprise investment scheme (EIS) or its junior partner, the seed enterprise investment scheme (SEIS); meaning that, by offering and advertising ISAs as a way to save, people without specialist knowledge may end up making less money by putting the money into an Innovative ISA rather than one of the other schemes.

The name “Innovative ISA” is a broad umbrella term that, pending the aforementioned report into including equity crowdfunding opportunities too, can be extended to other types of alternative finance in the future. The rules surrounding this new type of ISA will be clarified through technical consultation on the draft legislation, with the final arrangements set in time for the new tax year.

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