Innovative Finance ISA Allowance – Limits and Limitations
The annual ISA investment season is upon as, and recent months have seen a flurry of new Innovative Finance ISA accounts (IFISAs) launching in time for the end of the 2016/17 Tax Year.
With the new 2017/18 Tax Year comes another increase in the ISA savings allowance – which as announced in the government’s March 2016 budget, rose from £15,240 to £20,000 from April 6th 2017.
This increase in the annual limit for investment across all ISAs has been warmly welcomed by the investment community – and represents another positive step forwards for the ever-burgeoning peer-to-peer lending industry.
As investors and savers once again face the annual task of weighing up their investment options in time for the April 5th ISA deadline, we have taken a look at some of the facts and limitations that the ISA wrapper brings to the world of peer-to-peer lending.
ISAs have historically been used to encourage savers to place their capital into savings accounts or into stocks and shares before the end of the tax year, which comes around every April 5th. Recent years however have seen high-street savings rates crash through the floor, perhaps limiting any positive impact that might otherwise have been felt by investors following the introduction of the £1,000 personal savings allowance (which sits outside of the ISA rules). With the relief tapered to just £500 for 40% taxpayers, it is anticipated that the majority of cash savers will likely not earn interest in excess of this new form of tax relief – meaning that smaller Cash ISA holdings are in effect no more tax-efficient than smaller cash holdings held outside of the ISA system.
With the introduction of the Innovative Finance ISA, the increase in the annual ISA investment limit and peer-to-peer lending yields frequently quoted in excess of 5% per annum, many investors are now considering opening an IFISA as a means to target higher returns – even though IFISA returns are not directly comparable with cash investing in terms of risk.
The increase in the annual ISA limit marked the 18th anniversary of the introduction of the Individual Savings Account, and brought with it the largest increase in the allowance since the introduction of the scheme. ISA limits have nearly doubled since 2010 in order to further help savers at a time of unprecedentedly low cash interest rates.
Despite the increase in the annual ISA limit representing a positive step towards a more favourable treatment peer-to-peer lenders, some restrictions and limitations remain for the peer-to-peer investor:
- Current IFISA rules mean that individuals can invest into only one IFISA account within the tax year, via a single peer-to-peer lending platform. The IFISA rules do not currently permit the aggregation of peer-to-peer lending activities across multiple platforms – unlike with a stocks and shares ISA.
- The IFISA shares the annual ISA investment limit with the other types of ISAs (Cash ISAs, Stocks & Shares ISAs and, from April 2017, the Lifetime ISA). This means that an investor will have to apportion the annual limit out if he or she is looking to invest across more than one type of ISA in any given tax year.
- If an investor uses his or her full ISA allowance on Cash ISA saving or investments within either the Stocks & Shares or Lifetime ISA, the individual will have to wait until the following tax year before benefitting from the Innovative Finance ISA tax wrapper.
Interestingly, there is presently no upper limit that an investor can hit in terms of transferring Cash or the cash proceeds held within a Stocks & Shares ISA into an IFISA. This means that any investor who has accumulated capital within the ISA regime in excess of the annual limit will be able to transfer as much of this cash into an IFISA as the individual’s overall ISA holdings permit.
IFISA and the Spring Budget 2017
The Peer-to-peer lending community had been hoping for the annual ISA limit to be extended beyond £20,000 to £25,000 for IFISA investments, however this was not taken forward. Despite this – the budget calculations predict that some £185,000,000 in tax will be saved by individual investors within the ISA scheme as a result of the extension from £15,240 to £20,000.
At the time of writing however, there were still some 85 peer-to-peer lending platforms awaiting full authorisation from the FCA and from HMRC to formally launch the Innovative Finance ISA. A list of currently available IFISA can be found here.