The UK Government has announced that from April 2016, Peer-to-Peer (P2P) lending activities will be eligible for a new tax-free ISA for the first time.
The Innovative Finance ISA is a new type of savings account and is similar to a traditional Cash ISA. Capital is at risk.IFISA Guide
The Innovative Finance ISA provides savers using Peer-to-Peer (P2P) lending platforms to receive tax-free interest.Read the FAQ
Use the tax savings calculator to see how much tax you could save using the new IFISA.Calculate ISA Tax Savings
Use the calculator to project how much could be saved in tax through an Innovative Finance ISA.Calculate
From 6th April 2016 a new type of ISA will be introduced to sit alongside both the traditional Cash ISA and Stocks & Shares ISA. The new ISA will be known as the Innovative Finance ISA (IFISA) and it will allow savers to use some or part of their annual ISA investment allowance (£15,240 in the first year) to receive tax-free interest and tax-free capital gains on funds lent through FCA-regulated Peer-to-Peer Lending platforms.
Peer-to-Peer Lending platforms offer higher potential interest returns than many bank or building society savings or Cash ISA accounts – with many platforms citing anticipated returns in excess of 8% per annum.
The new “IFISA” was introduced in April 2016 and is intended to house new forms of investment which are not eligible for either the Cash ISA or Stocks & Shares ISA. The IFISA sits alongside these two existing forms of ISA and protects your investments in exactly the same way, allowing you to protect your returns from both income tax and capital gains tax. The Government’s decision to introduce the IFISA follows a growing pattern among individual UK investors to deploy cash holdings into crowdfunding-type investments such as Peer-to-Peer lending.
The new IFISA shares the same investment limit as the existing Cash and Stocks & Shares ISAs. During the current (2016/17) Tax Year, individual investors may invest up to £15,240 into one or more ISA. Interest income generated from funds deployed via an IFISA will be protected from income tax.
Investors are free to choose how their annual ISA allowance is used. This means you can elect to split your annual ISA allowance across the IF, Cash and Stocks & Shares ISAs in whatever ratio fits your investment and risk appetite. Investors may only deploy cash into a single Innovative Finance ISA per year, meaning that investors wishing to receive tax-free returns on Peer-to-Peer lending must currently choose one IFISA from the various Peer-to-Peer platforms. Investors are free to transfer funds between their IFISA and their Cash and Stocks & Shares ISAs. The annual ISA limit (currently £15,240) represents the total combined annual limit – there is nothing to stop an investor from changing the way this ISA allowance is allocated.
Delays within the Financial Conduct Authority (FCA), the UK’s regulatory authority for ISA tax vehicles, mean that not all of the UK’s Peer-to-Peer lending platforms managed to launch their Innovative Finance ISAs in time for the 6th April launch date. New Innovative Finance ISAs will be launching over the coming months as these FCA authorisations complete.
Whilst advertised Peer-to-Peer returns (and by extension, implied Innovative Finance ISA returns) can compare favourably to other forms of ISA investment, this is not the same as Cash ISA investing and your capital is entirely at risk. The key risks associated with Peer-to-Peer lending can be found here – however, some of the primary considerations to any would-be Innovative Finance ISA holder are:
Most UK cash savings accounts (bank, building society and Cash ISA accounts) are protected by the Financial Services Compensation Scheme (FSCS). The FSCS is a Government-backed scheme which will compensate savers up to the value of £75,000 in the event that that bank, building society or Cash ISA provider were to fail. Peer-to-Peer lending platforms, and by extension Innovative Finance ISA providers, are not protected by the FSCS.
The quoted interest returns often assume that all of your capital is lent out for the entire year. In reality however, interest is rarely paid unless your cash has been deployed into Peer-to-Peer loans. If you choose to deploy larger sums into a Peer-to-Peer lending platform, it may take several days, even weeks, for that platform to fully deploy the funds and, during this time, you will very likely receive no interest return on your cash.