The government has today launched a consultation that could see it launch a third type of Isa that enables people to invest in peer-to-peer (P2P) products within the tax-free wrapper.
The fledgling P2P industry, which sees savers lend money directly via websites such as Ratesetter and Zopa in order to gain better returns on their money, has seen £1.6 billion lent to borrowers so far.
At this year's Budget, chancellor George Osborne announced that peer-to-peer lenders would be able to use the wrapper for the first time, making the interest earned on their money tax-free– something the industry has long called for.
However, since then the industry has been waiting for further announcements on how this would happen.
The two-month long consultation will now look at how best to introduce the changes, with a question over whether peer-to-peer loans should be included in existing cash Isas or stocks and shares Isas – or if a completely new, third type of Isa should be created instead.
It will also address concerns that, unlike bank cash deposits, money in a peer-to-peer arrangement is not protected by the Financial Services Compensation Scheme (which protects savers' money up to £85,000 per person, per institution), meaning there is a risk investors could lose their money.
David Gauke, financial secretary to the Treasury, said: "We want to support savers at all stages of their life and make sure they have greater flexibility and choice over how they invest and access their savings.
"Peer-to-peer lending is an exciting, innovative new sector and it's right that investors who want to lend money via peer-to-peer platforms should be able to hold these loans in their Isa alongside more traditional investments."
Giles Andrews, Zopa chief executive and co-founder, said: "The government consultation is a positive step forward to help define how peer-to-peer lending is included and we would welcome a third Isa for peer-to-peer.
"Whatever the outcome, it's certain that UK savers will earn over three times more interest; tax free, than from the disappointing low returns currently available from high street banks."
Rhydian Lewis is founder and CEO of RateSetter, added: "This consultation marks a tipping point for the UK P2P market - it is estimated that ISA inclusion will see the sector grow from £2 billion to £45billion within the next few years.
"By allowing the higher rates of interest on offer to be shielded from tax, the inclusion of peer-to-peer will breathe new life into Isas.
"We are delighted that they are also considering a third ISA category that opens up a new choice to the polarised options of cash or investments - providing that missing link between low returns and high risk."