The Innovative Finance ISA explained

15th April 2016
The Innovative Finance ISA explained

In July 2015, Chancellor George Osborne announced the introduction of a new ISA class - the Innovative Finance ISA, a tax-free ‘wrapper’ for marketplace lenders that allows investors to invest up to £15,240 per tax year in Peer to Peer loans.

The IFISA, which was officially released made available to consumers on April 6 this year, has been hailed as a halfway-house between the low-risk and low-return rate of the standard Cash ISA and the higher-risk, greater-return rate of the Stocks and Shares ISA.
So, what is it?

Simply put, the IFISA will allow you to channel any marketplace Peer to Peer investments through an ISA, essentially ‘wrapping’ up your investment with an annual tax-free allowance up to £15,240. All returns from your investment will go right back into your pocket with no need to tell the taxman and no need to declare it on your tax return.

What is new?

Though the basic premise of the IFISA is similar to a normal ISA - tax-free investment and return, the actual ISA itself is very different from the traditional Cash ISA and Stocks and Shares ISAs.

Cash ISAs 

Otherwise known as an Individual Savings Account. These work like a basic savings account with the added sugar coating of being tax-free up to the £15,240 allowance. A simple, low-risk and hassle-free way to invest your money but with a fairly low return. Cash ISAs, like the IFISA offer a guaranteed fixed return over the investment period.

Innovative Finance ISA

Fresh on the scene, the IFISA occupies the centre ground between the low-risk Cash ISA and the more volatile Stocks and Shares ISA. The IFISA offers a fixed return rate like Cash ISAs and are less vulnerable to market fluctuations but they’re not covered by the Financial Services Compensation Scheme should the provider Peer to Peer platform go under. 

Stocks and Shares ISAs

And in the other corner, the Stocks and Shares ISA which allows you to invest in business equity, stocks and shares. These investments, though potentially lucrative are subject to the volatility of the market and as such are seen as longer term investments. Unlike IFISAs, Stocks and Shares ISAs are covered by the FSCS up to £50,000 (but only if the Stocks & Shares platform provider goes bust – not the investments themselves).

How to get started

Who is offering the IFISA?

Upon its release on April 6, only a handful of smaller providers had actually been cleared by the FCA with major providers such as Funding Circle, Zopa, Ratesetter, Landbay and Wellesley waiting on the FCA to approve their applications. 

Am I locked in to a fixed term?

That very much depends on the platform that you’ve invested in. Much like a fixed term ISA, IFISAs come in various different shapes and sizes. See the platform specifics to find out what they’re offering.  

Where can I get an IFISA?

As of yet, none of the big providers have been approved by the FCA but as soon as they do we’ll be letting our customers know. Subscribe to our mailing list to get all the updates. 

What is the risk?

As with all marketplace investments there is a risk with the IFISA. a) Marketplace lending is about investing in loans, and therefore your capital is at risk if the borrower defaults. Marketplace lending is not covered by the FSCS which means that should the platform go bust, you won’t be able to make a compensation claim to cover your losses. 

That said, marketplace lending by its very nature aims to reduce the chance of serious capital loss by spreading your investment across many different borrowers. Most platforms have also created provision funds to safeguard your capital from defaults and have special criteria when choosing borrowers to reduce the risk to your investment. 

What is a typical return?

With greater risk comes greater potential for return. Typically a Cash ISA can currently offer around 1.5% fixed over the investment term with Stocks and Shares offering anywhere from 6-14% which is variable throughout the investment period. An IFISA on the other hand can offer anywhere from 4-10% without the market volatility of Stocks and Shares but with greater returns than the Cash ISA and a fixed rate. 

Have you already got an ISA? 

I already have an ISA, can I get an IFISA?

The simple answer is yes. So long as you don’t invest more than £15,240 per financial year in total it’s perfectly acceptable to split your allowance across the three types of ISA. 

For example, if you already have a Cash ISA with £10,000 which you’ve invested this financial year, you may invest your other £5,240 in either (or both) of the other types of ISA. 

Can I transfer my ISAs?

This is where it gets tricky so stay with us. Transferring an ISA doesn’t actually count towards your £15,240 allowance so in theory you could transfer your IFISA to another provider anytime a better deal comes around without using up your allowance. Remember to check with your provider as fees may apply. 

Let’s say you’ve just opened an IFISA this financial year and invested £10,000. You may not open another one until the next financial year but you may transfer all £10,000 into another IFISA if you wish. The same rules apply for the Cash ISA and the Stocks and Shares ISA. 

Still with us? In a nutshell, you cannot have two ISAs of the same type, which have been opened in the same financial year, running side by side but you may transfer all of the investment out of one and into another or into another type of ISA. 

And breathe.

Can I hold an IFISA with more than one provider?

HMRC have just announced that, in contrast to what was previously thoughta previous stance, it will be possible to have more than one marketplace lending platform channelled through an IFISA though no providers are currently offering this service. Check back for more information or subscribe to our mailing list to find out more. 

I already have marketplace investments, can I transfer these?

Sadly not. Currently the IFISA only applies to so-called ‘new money’ so assets which are currently tied up in marketplace investments and P2P loans cannot be transferred into your new IFISA – yet. Watch this space. 

However, several providers are considering offering their ISA products to existing customers first before marketing them to the wider investment market. Join our mailing list to be kept up to date with the latest developments. 

Download the guide and take it with you wherever you go.

Your capital is at risk if you lend to businesses. Peer to peer lending is not protected by the Financial Services Compensation Scheme. Please read our full risk warning here.