The consultation examines whether P2P loans should be included in existing stocks and shares ISAs, or whether they would be best suited to a new, third type of ISA.
Currently, peer-to-peer websites, like Zopa and Ratesetter, accept money from savers which they then lend out to individuals or businesses, with £1.6bn loaned through this type of business to date.
Although Chancellor George Osborne announced in this year’s Budget that the loans would qualify to be included in ISAs, and therefore be tax free, they would not be currently protected by the Financial Services Compensation Scheme.
As part of the consultation, the government is proposing to make the provision of advice to investors on loans made via peer-to-peer platforms a regulated activity.
The consultation proposes that firms currently authorised to advise on investments will be eligible to elect to have authorisation to advise on peer-to-peer loans automatically conferred.
The consultation initially proposes peer-to-peer loans comply with existing ISA rules unless there are compelling arguments otherwise.
Giles Andrews, CEO and co-founder of Zopa, said: “Peer-to-peer ISAs will be a game changer for millions of hard working Brits, and a major shakeup for the UK banking sector.
“The government consultation is a positive step forward to help define how P2P lending is included and we would welcome a third ISA for P2P.
“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.”
Commenting on the consultation, David Gauke, financial secretary to the Treasury, said: “P2P lending is an exciting, innovative new sector and it is right that investors who want to lend money via P2P platforms should be able to hold these loans in their ISA alongside more traditional investments.
“At the moment, the interest that lenders earn from lending money via P2P platforms is taxable, but once P2P loans can be held in ISAs then it will be possible to earn interest entirely tax free.
“Allowing P2P loans to be held in ISAs will provide greater choice to ISA investors, and will support the government’s aim to diversify the different sources of finance that are available to borrowers by encouraging the growth of the P2P lending sector.”