What is an Innovative Finance ISA and how does it work?
The Innovative Finance ISA (IFISA) is just one of several types of ISA (Individual Savings Account) and it enables you to lend your money and earn a tax-free return. Here is everything you need to know about the IFISA and how it can make your peer-to-peer (P2P) loan investments more tax-efficient.
What is an Innovative Finance ISA?
An IFISA, or Innovative Finance ISA, is a type of savings account that allows you to invest in peer-to-peer (P2P) loans. Effectively, it is a tax-free wrapper that holds your peer-to-peer loan investment, just like a Cash ISA holds cash and a Stocks & Shares ISA holds your stocks and shares investment.
How does an Innovative Finance ISA work?
IFISAs were introduced in April 2016 by the UK government as a way to encourage people to invest in new and innovative types of finance, including P2P lending.
An IFISA allows you to deposit up to your full £20,000 ISA allowance per year into P2P loans and receive tax-free returns. Should you choose to transfer existing ISA funds into a new IFISA, then your transferred balance will not affect your allowance and you will still be permitted to use your £20,000 allowance as you choose within the ISA rules.
How do I open an IFISA?
If you want to open an IFISA, you will need to open a P2P lending account with a platform that offers IFISAs, such as FOLK2FOLK. Once you have opened an account, you can set up a new IFISA account or transfer your existing ISA into an IFISA.
It’s important to remember that you can only invest up to the £20,000 ISA investment limit per year. Additional funds can be added to the platform in the same year but these will remain outside of the IFISA tax-free wrapper and returns will be subject to tax.
Can I have an IFISA as well as another kind of ISA?
Yes, you can hold more than one ISA account at a time, but you can only subscribe to one of each kind of ISA in any tax year. This means that if you have an IFISA, for example, you can also subscribe to a Cash ISA or Lifetime ISA in the same tax year but not another IFISA. The £20,000 new investment limit per year would then be split between all your active ISAs.
You are also able to transfer any existing ISA into an IFISA.
Can I transfer my existing ISAs to an IFISA?
Yes, you can. An ISA transfer is the process that lets you move all, or part of the money built up in previous years to a new provider without losing the tax-free status of that money.
You can transfer an ISA from one provider to another or use it to move your money between different types of ISA– for example, if you wanted to move your money from a Cash ISA into a IFISA.
What kind of returns can I expect from an Innovative Finance ISA?
The returns you can expect from an IFISA will depend on the underlying loan investment. Via FOLK2FOLK for example, you can receive monthly interest of typically 6.5% p.a. tax-free.
It’s important to remember that all investments come with risks and your capital is at risk when investing in an IFISA, and you could lose some of your money.
Are Innovative Finance ISAs covered by the FSCS?
No, they are not covered by the Financial Services Compensation Scheme (FSCS).
The FCA determined that P2P lending would not be covered by the FSCSHowever, what it means to be covered by the FSCS is so frequently misunderstood.
The fact is, the FSCS does not provide compensation in relation to loss caused by bad investment performance. Compensation may only be claimed when a financial services product provider goes bust, or if there is a loss arising from bad investment advice from an authorised third-party such as an IFA or Wealth Manager and that advice is shown to have been unsuitable and the adviser’s business has failed in the meantime.
In fact, because P2P lending is not covered by the FSCS, the FCA put in place other additional protective measures which are explained here.
If you’re looking for a more tax-efficient way to invest in peer-to-peer lending, an IFISA could be the right choice for you. To learn more about the FOLK2FOLK IFISA and how it works, visit our IFISA page here.