* UK proposes allowing P2P investments in tax-free accounts
* Market could leap to 45 bln pounds in 10 years - Liberum
* Investment firms say details, regulation key to uptake
By Freya Berry
LONDON, March 21 Peer-to-peer lending, where individuals lend money directly to small companies or other individuals, could be set to take off in Britain after the government proposed allowing such investments to be included in tax-free savings accounts.
Keen to improve returns for savers struggling with low interest rates and to help improve small companies' access to credit, the government said in its annual budget on Wednesday that it was looking at letting peer-to-peer (P2P) investments into popular tax-free Individual Savings Accounts (ISAs).
Analysts at broker Liberum said such a move would be a major boost for an industry which offers high returns, in exchange for the higher risks involved. They forecast it could jump in size to 45 billion pounds ($74 billion) within a decade, from less than 1 billion now.
"I think it will be a tipping point," said James Meekings, co-founder of P2P platform Funding Circle.
"Tax breaks allow people to lend to slightly more risky businesses ... the challenges are the details of how it works with existing industry."
P2P loans allow individuals to invest in a low-cost way, usually via online platforms.
The government hopes the industry will help boost credit to firms faced with a cut in bank lending, and assist savers struggling with rock-bottom interest rates.
The average net return from investors using Funding Circle is 6.1 percent. By comparison, a low-risk, cash ISA might offer about 1.75 percent, the website moneysavingexpert.com showed.
Under the proposed new rules, on which the government is consulting and has not set a date for implementation, P2P platforms could be allowed to offer their own ISAs in competition with providers of mainstream cash or equities ISAs such as Fidelity and Hargreaves Lansdown.
With the P2P sector still so young and lightly regulated, however, the traditional providers say growth is unlikely to be quick, at least in the near future.
"P2P isn't ready to go into ISAs yet," said Danny Cox, head of financial planning at Hargreaves Lansdown. "In its current form, it's a relatively small and immature market, whereas we're working with billions of pounds."
Cox said detail about the government plans - particularly whether they would allow for the flexibility of transferring money in and out of ISAs and the daily valuations his clientele demands - would be crucial to determining eventual take-up.
P2P lending is also still largely unregulated, although that will change in April when the Financial Conduct Authority plans to announce a set of industry rules.
"Being an unregulated product in a regulated world, we need to see what the products are like when they come out the other side," Cox said.
Competition for the ISA pound is sharp and likely to intensify given the sums involved.
Some 57.4 billion pounds a year is invested by adults in ISAs, data from the Tax Incentivised Savings Association shows, while Hargreaves Lansdown's Vantage ISA division alone is worth 13.6 billion pounds.
And that pie is only likely to get bigger after finance minister George Osborne this week nearly tripled the ISA allowance to 15,000 pounds a year.
($1 = 0.6057 British Pounds) (Editing by Simon Jessop and Mark Potter)