The government is changing its rules on investments that can be held in individual savings accounts (Isas), Junior Isas (Jisas) and Child Trust Funds (CTFs) to include a wider range of bonds and shares in peer-to-peer lending investment trusts.
From 1 July, these tax wrappers will be able to include:
• securities (including retail bonds) and shares issued by housing associations and other co-operative societies or community benefit societies;
• a broader range of securities issued by companies, including those admitted to trading on certain small- and medium-sized enterprise (SME) markets; and
• shares in a wider range of investment trusts.
In order for shares in an investment trust to be eligible for Isa inclusion no more than 50 per cent of the trust's investments by value can be made up of securities that would not, if purchased on their own, qualify to be held in an Isa. This has meant that the three investment trusts that invest in peer-to-peer lending - P2P Global Investments (P2P), VPC Speciality Lending Investments (VSL) and Ranger Direct Lending (RDL) are in theory not Isa eligible.
However, some Isa providers already consider that some of these are eligible. For example, Hargreaves Lansdown will accept P2P Global Investments and Ranger Direct Lending into its Isas.
But from 1 July these three trusts will be eligible for all Isas that can hold investment trusts.
"That's clearly very positive for a yield-based investment and provides a much more practical way to gain exposure to P2P lending as an asset class through a highly diversified route, rather than brokers and advisers having to create a whole new operational infrastructure to enable investors to directly invest in individual lending deals through an Isa," says Jason Hollands, managing director at Bestinvest.
There are also plans to allow peer-to-peer loans to be held in Isas either later this year or next year.
Investment trusts focused on peer-to-peer loans and platform lending started launching last year with P2P Global Investment s initial public offering (IPO), and the sector is growing. It has been joined by two further trusts and GLI Finance (GLIF) is soon launching GLI Alternative Finance, which will invest in a diversified portfolio of SME loans. The trust will target a net dividend yield of 8 per cent a year of the issue price of the ordinary shares. It will have a management fee of 0.75 per cent a year up to £100m and 0.5 per cent a year over £100m, charged on the lower of net asset value (NAV) or market capitalisation. It will not charge a performance fee - unlike some of its peers.
GLI Finance is already eligible for Isa inclusion because it is not structured as an investment trust.
P2P Global Investments, meanwhile, has just raised £21.5m via a tap issue as it has already invested about 90 per cent of the proceeds of a 'C' share issue it did in January, and its managers have found some investments they think are attractive for which they need more funds.
In addition to this, the trust hopes to raise in excess of £250m via a further 'C' share offer in July. P2P Global Investment's ordinary shares trade at a premium to NAV of 10 per cent and 'C' share offers can offer the opportunity to get in at a lower rating.
Bonds
Securities such as bonds issued by housing associations and small companies are higher risk and not covered by the Financial Services Compensation Scheme (FSCS) in the event of failure, unlike open-ended bond funds.
"Individual bonds may offer attractive headline rates of return; however, investors must understand the risks of capital loss," says Danny Cox, head of communications at Hargreaves Lansdown. "In most cases, investors would be better served by using a fixed interest fund since this provides much wider diversification and the benefits of an actively managed bond portfolio."
He adds that you need to consider if the risk of holding a single bond is worth the yield you are getting, and for many private investors this is unlikely to be the case.
It may also be hard to find an Isa provider who would be willing to hold more unusual assets such as housing association bonds. Tilney Bestinvest's Isa, for example, doesn't accept direct bonds, but rather funds, investment trusts, exchange traded funds (ETFs) and direct shares.
Hargreaves Lansdown says it will offer securities as long as they are tradable and registered to settle through CREST - a settlements system for shares and securities. Hargreaves' Vantage Isa already offers access to more than 700 corporate bonds and gilts, most of which can be held in an Isa. These include the Golden Lane Housing (MCAP) bond which is Isa eligible.
Mr Cox says that the changes on 1 July won't affect the Isa status of any of their bond offerings.
Alliance Trust Savings is reviewing what can be held in its Isa following these forthcoming changes. Investors using its Isas can currently hold open-ended funds, investment trusts, equities, ETFs, corporate bonds and gilts.
