By Jonathan Davies

The government is consulting on plans to introduce a separate tax-free individual savings account (ISA) specifically for people who lend money using peer-to-peer lending sites.

The Chancellor George Osborne announced in the Budget that peer-to-peer lending would qualify for ISAs, meaning the interest lenders receive would be tax free.

But questions have been raised over how exactly it will be done. The proposed new form of ISAs aren't currently protected by the Financial Services Compensation Scheme.

The government will now consult on forming the new, separate ISA for peer-to-peer lending.

Individuals add funds to peer-to-peer lending websites, allowing them to lend to other individuals or businesses. Although there is generally a greater risk associated with peer-to-peer lending, if successful it often brings above-average returns for the lender.

John Allan, National Chairman, Federation of Small Businesses, said:

“We welcome these proposals. When getting finance, small firms face a market dominated by the large banks. Encouraging investment by peer to peer investors through the tax relief afforded by the ISA wrapper will give a boost to alternative finance channels. This increases choice in the market and provides competition to the banks. We look forward to Government developing these reforms, and implementing them as soon as possible.”

Rhydian Lewis, founder and CEO of RateSetter, one of the country's biggest peer-to-peer lending platforms, said: This consultation marks a tipping point for the UK P2P market - it is estimated that ISA inclusion will see the sector grow from £2bn to £45bn within the next few years.

“By allowing the higher rates of interest on offer to be shielded from tax, the inclusion of P2P will breathe new life into ISAs. This public consultation is a particularly welcome one for hard-pressed savers who have been crying out for another option. The appetite is certainly there: research we carried out with Populus earlier this year revealed that two-thirds of people will consider trying P2P when it is ISA-able."

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