Innovative Finance ISA Rules
Rules as of April 2017
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.
Much of the regulatory and legislative framework pertaining to the new Innovative Finance ISA is still being finalised; indeed, full FCA Regulations and HMRC Guidance has yet to be forthcoming.
What follows is a high-level summary of what we do now know:
An overview of the IFISA rules
- Innovative Finance ISA investors will be able to lend money via the ISA without the need to pay any income tax on the interest they earn.
- Investors will 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 is currently exclusively for debt-based Peer-to-Peer lending activities, the scope of the Innovative Finance ISA is likely to be extended over time. The Government has announced that it plans to extend the IFISA’s remit to include Debentures from Autumn 2016 – a form of debt which is not currently eligible for IFISA investing. On August 9th 2016, HMRC published draft legislation that proposed the inclusion of other debt based securities from November 1st of the same year.
- 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.
- 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-Per 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 iteslf, by the Stocks & Shares ISA platform provider, and the funds then transferred across intop the Innovative Finance ISA as cash.
For further information on the Innovative Finance ISA, please visit our IFISA guide here.