Innovative Finance ISA Rules
Rules as of April 2018
The UK Government’s decision to introduce the new Innovative Finance ISA in April 2016 has required a partial re-write of the old Individual Savings Account (ISA) Regulations.
First and foremost, it was agreed that the new Innovative Finance ISA rules would take the form of an extension to, rather than stand separately from, the existing regulatory framework.
The regulatory and legislative framework pertaining to the new Innovative Finance ISA has stayed the same for 2018/19.
What follows is a high-level summary of what we know:
An overview of the IFISA rules
- Innovative Finance ISA investors are able to lend money via the ISA without the need to pay any income tax on the interest they earn.
- Investors can only be able to contribute to one Innovative Finance ISA account per tax year. Whilst the individual will be able to lend money via multiple peer-to-peer lending platforms, only one IFISA may be contributed to.
- Whilst switching IFISA providers will be possible, it may prove difficult in practice due to the fact that the investor will – by the very nature of peer-to-peer lending – very likely hold debt securities with that platform which cannot be transferred into a different peer-to-peer lending platform.
- The Innovative Finance ISA will share the annual ISA investment limit (currently £20,000 per year) with the other more established forms of ISA saving and investing. This means that, in practice, an investor will need to make a decision as to what portion of his or her annual ISA limit is to be deployed into each kind of ISA each year.
- Investors who have already used their full annual ISA allowance – either through Cash ISA saving or through Stocks & Shares ISA investing – will not have any allowance left over with which to invest in their Innovative Finance ISA, and will have to wait until the next tax year.
- Not all kinds of “crowdfunding” are eligible. Whilst the UK Government has been willing to include regular debt crowdfunding (also known as peer-to-peer lending), it has explicitly excluded equity-based crowdfunding securities from the list of eligible investment types.
- Whilst the IFISA was originally intended to be exclusively for debt-based peer-to-peer lending activities, the scope of the Innovative Finance ISA was extended over time. The Government announced that planned to extend the IFISA’s remit to include Debentures from Autumn 2016 – a form of debt which was not eligible for IFISA investing in 2016. On August 9th 2016, HMRC published draft legislation that proposed the inclusion of other debt-based securities from November 1st of the same year. This is now in effect.
- It is unlikely that there will be a mechanism for existing peer-to-peer lenders to transfer-in existing peer-to-peer loans into their newly-opened Innovative Finance ISA accounts. It is best to check with each individual p2p provider.
- Whilst there is an annual IFISA investment limit of £20,000, this cap relates exclusively to newly introduced capital which is subscribed to peer-to-peer lending during the current Tax Year. This means that there is in effect no limit to the overall amount of ISA cash that an investor can transfer into his or her IFISA, provided it has been accumulated within the ISA regime over previous years – meaning a £100,000+ Cash ISA account could be transferred in its entirety into peer-to-peer lending via an Innovative Finance ISA, if the investor so wished.
- Investors wishing to transfer-in existing Stocks & Shares ISA capital will not be able to transfer in their existing investment holdings – investors cannot hold stocks or shares within an Innovative Finance ISA. Instead, such investments will need to be liquidated within the Stocks & Shares ISA itself by the Stocks & Shares ISA platform provider, and the funds then transferred across into the Innovative Finance ISA as cash.
For further information on the Innovative Finance ISA, please visit our IFISA guide here.
Updated: Tuesday, September 4th, 2018