The Innovative Finance ISA
What is an Innovative Finance ISA?
The UK Government introduced the Innovative Finance ISA on 6th April 2016. The “IFISA” allows individuals to use some (or all) of their annual ISA investment allowance to lend funds through the growing Peer-to-Peer lending market, whilst receiving tax-free interest and capital gains.
Details of the first Innovative Finance ISA products were released in February 2016, with some ISA providers offering expected returns of between 6-8% – a much higher rate than many traditional bank or building society Cash ISA accounts are currently able to offer. However, these two forms of ISA saving are inherently different, and it is important to understand the key differences – particularly the risks associated with peer to peer lending.
How does this differ from a Cash ISA?
In simple terms, the rates offered by Innovative Finance ISA providers are typically around double the rates offered by Cash ISA providers. The Innovative Finance ISA providers are able to do this for a number of reasons – the key premise being that Peer-to-Peer lending cuts out the “middle man” bank, allowing borrowers to pay less in interest but also allowing investors to receive more.
Peer-to-Peer lending – the type of loans which are made via an Innovative Finance ISA – are not without risk however. Certainly, this is not merely a case of comparing interest rates on a like-for-like basis against bank or building society Cash ISA accounts.
The higher rates of interest which are achievable under Peer to Peer loans do come with a higher risk profile – and crucially, unlike a UK bank or building society account, peer-to-peer lending is not currently protected by the Financial Services Compensation Scheme (FSCS).
Read more on the FSCS and Peer to Peer lending.
What's included vs. what's excluded
The new Innovative Finance ISA allows individuals to lend money through FCA-regulated and approved peer-to-peer lending website, also known as peer-to-peer lending platforms.
Peer-to-peer, often abbreviated as P2P and also known as ‘crowdlending’, is a rapidly growing form of lending that serves three key sectors; personal loans, small business loans and property loans. All three forms of P2P loan are permitted under the new Innovative Finance ISA.
On August 9th 2016, HMRC published draft legislation to expand the coverage of the IFISA to include other debt based securities.
Confusingly, equity-based investing and peer-to-peer lending are often interchangeably referred to within the popular press as ‘crowdfunding’ – a catch-all phrase.
Whilst the scope of the Innovative Finance ISA extends to cover peer-to-peer lending platforms, it does not extend to include equity-based investing.
The new Innovative Finance ISA will be available to any UK taxpayer aged 18 or over.
Unlike with Cash ISAs, the Government has confirmed that there are no immediate plans to introduce a Juior Innovative Finance ISA for the under-18s.
2016/17 IFISA limit
The IFISA launched on the 6th April 2016.
The ISA investment limit for the 2016/17 tax year was £15,240 per person, but this increased to £20,000 in the April 2017/18 tax year.
The annual ISA limit determines the extent to which any individual may invest into ISAs during a given tax year.
The rate is set by the UK Government on an annual basis. Whilst you can split your £20,000 allowance across multiple forms of ISA investing (Cash ISA, Stocks & Shares ISA, Innovative Finance ISA, etc), the combined amount invested during the tax year must not exceed the limit.
ISA Tax Planning
- Remember that your 2017/18 ISA allowance must be used before 05 April 2018, otherwise it is lost forever. You cannot ‘roll over’ your ISA investment allowance into the following tax year.
- You do not have to invest the entirety of your £20,000 ISA limit – you can invest any amount up to this level.
- You do not have to invest in a single lump – you may spread your ISA investment across the year howsoever you see fit.
- You can potentially build up a significant ISA holding over time by maximising the use of your annual ISA investment allowance each year.
- Your £20,000 annual ISA investment allowance is not based upon the interest you receive on your Innovative Finance ISA peer-to-peer lending activities – the annual allowance is simply based upon the amount of money that you inject into the peer-to-peer lending platform during the year.
- You are only permitted to hold one Innovative Finance ISA account each tax year. Lenders will be able to open a new Innovative Finance ISA with a different P2P platform each tax year.
- You can deploy more than £20,000 into the peer-to-peer lending sector, but only the first £20,000 per year will be eligible to sit inside your Innovative Finance ISA.
Many peer to peer lending platforms are still working with the FCA to become fully authorised to provide the IFISA. None of the major peer to peer lending platforms provided the Innovative Finance ISA and 85 applications were still in progress as at February 2017.
More IFISA accounts will launch over the coming months, please see our list of available IFISA accounts.
In October 2016, Lending Works was the first major peer to peer lending platform to receive authorisation from the FCA to operate an IFISA. Lending Works launched their ISA to individual lenders in February 2017.
UK Government supports the Peer-to-Peer Lending sector
The UK Government announced in February 2014 that it would be supporting the growth of the UK’s Peer-to-Peer lending sector by lending £40,000,000 via the peer-to-peer lending platform Funding Circle.
The first tranche of the loan drew down in March 2014 with the intention of supporting around £450 million of SME business lending over the 18 months to September 2015. The idea that £40 million could in time result in over £450 million having been lent to small British businesses is a function of the fact the initial £40 million pot would be re-churned and re-lent within the Peer-to-Peer lending system as and when loans were being paid down. In other words, as each loan was repaid by the borrowing business, those funds were subsequently made available for another business to borrow.
This was not the UK Government’s first foray into the Peer to Peer lending space. Indeed, an earlier investment was made in December 2012 in which £20 million of state funds were lend out via Funding Circle by the Business Finance Partnership (the BFP being a predecessor to the British Business Bank).
To illustrate the multiplier effect that rolling-over a peer to peer investment can have on British business, the Government has publicly stated that their initial £20 million of loan capital resulted in a total of £130 million of loans made to SME businesses through Peer to Peer lending. As each loan was repaid, the funds then became available for another creditworthy business to draw upon.
Some examples of the Peer to Peer loans made by the UK Government include:
- Bramley & Gage, a manufacturer of gin and fruit beverages which is based in Bristol. The founders began making liqueurs over 20 years ago on a fruit farm in South Devon. The company borrowed £25,000 from 248 people in the UK (including the UK Government), in order to acquire a new gin still which would be used to increase the company’s productive capacity.
- Moo Free Chocolate, a Reading-based company which is widely regarded as a world-leading manufacturer of dairy-free, gluten-free and organic chocolates, borrowed £60,000 from the UK Government via Peer to Peer lending so that it could acquire new machinery and ingredients, in order to increase production.
- The UK Government also lent to Kaizen, a luxury furniture manufacturer who turned to Peer to Peer lending to borrow £100,000 in order to expand.
At the point that the UK Government announced publicly that it had chosen to lend an additional £40 million through Peer to Peer lending, Vince Cable, the Business Secretary, stated that:
“The Business Bank is helping to support serious volumes of lending to small and medium sized businesses through new finance providers. Too much business lending is concentrated in the big banks and, if we’re to have a properly functioning business lending market, they need to be challenged by new banks, peer-to-peer lenders and other alternative providers.”
What is the British Business Bank?
British Business Bank PLC is a Government-established, UK state-owned bank which was launched by the David Cameron’s Conservative government on 1st November 2014.
The bank was formed and ultimately launched with the sole intention of increasing the availability of credit (i.e. the availability of borrowing facilities) to the UK’s 5.2 million small and medium enterprises (SMEs). The bank’s lending efforts were also to be bolstered by a secondary offering, that of SME business advice and support.
Based in Sheffield, the bank is in effect a subsidiary of the Department for Business Innovation and Skills (BIS).