What is an Innovative Finance ISA?

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.

You can invest up to £20,000 per year

The new IFISA shares the same investment limit as the existing Cash and Stocks & Shares ISAs. During the current (2017/18) Tax Year, individual investors may invest up to £20,000 into one or more ISA. Interest income generated from funds deployed via an IFISA will be protected from income tax.

You can split your annual allowance across different kinds of ISA

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 £20,000) represents the total combined annual limit – there is nothing to stop an investor from changing the way this ISA allowance is allocated.

How to open an Innovative Finance ISA

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.

  1. Start by checking your IFISA eligibility
    Not everybody in Britain is entitled to open an Innovative Finance ISA. Applicants must be UK-residents aged 18 or over. IFISA have a responsibility to check your eligibility, and providers will likely ask for your National Insurance number in order to verify that you are indeed a UK resident.
  2. Choose an IFISA provider and make an application
    Assuming your are eligible for the Innovative Finance ISA, you must now decide which IFISA provider you wish to open your account with. By law you may only open one IFISA during any given Tax Year.
  3. Start paying in to your IFISA
    With your IFISA application approved and your account open, you may commence paying into the IFISA platform – subject to an overall cap of £20,000 (your annual ISA limit). You will need to bear in mind that this annual cap applies across your aggregate IFISA, Cash ISA and Stocks & Shares ISA investments – i.e. it is a combined overall limit rather than an individual limit.

Make sure you understand the risks

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:

Unlike with savings, your cash is not protected

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.

Quoted returns rely on funds being fully lent out

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.