Innovative Finance ISA (IFISA) Overview
Back in 2015, the UK Government announced plans to allow peer-to-peer (P2P) loans to be held within Individual Savings Accounts (ISAs). Following this, April 6th 2016 saw it come to fruition, permitting lenders to benefit from tax-free returns on up to £15,240 (Increasing to £20,000 for 2017-2018), due to the new Innovative Finance ISA (IFISA).
The IFISA is the third type of ISA, alongside the existing Cash ISA and Stocks & Shares ISA. However, the significant difference being it’s the first to incorporate the P2P lending sector. P2P lending has been recognised as ‘cutting out the banking middlemen’, due to permitting savers to lend directly to borrowers. It’s an asset class that has grown significantly in the last few years. Represented in the latest OFF3R Index that showed total P2P lending in 2016 was £2.6bn, up by approximately £700m from 2015.
How Does it Work?
With the new IFISA, individuals can lend money through FCA-regulated and approved lending platforms. As of January 2017, there are 10 P2P platforms that have been approved as IFISA providers. Three key sectors: property, personal & small business loans are served through the P2P lending sector, all of which are permitted under IFISA umbrella with returns of between 3-19% per annum being offered.
In addition to offering much higher returns than a traditional bank Cash ISA, it is important to note the risks associated with P2P lending can correlate to this.
Who is Eligible for the Innovative Finance ISA?
Any UK taxpayer aged 18 or over.
What are the Benefits & Restrictions of the Innovative Finance ISA?
|IFISA BENEFITS||IFISA RESTRICTIONS|
|1. Unlimited transfer of funds from adult ISAs (Stocks & Shares and Cash).||1. Cannot transfer existing P2P funds into IFISA. Must sell & re-invest. (However, this is likely to change).|
|2. Tax-benefits on subscribed annual allowance.||2. Cannot store P2P products outside of your IFISA provider i.e. Platform X IFISA only stores Platform X products.|
|3. High interest rates: Products range from 3% -19% per annum.||3. Cannot subscribe annual allowance to more than one IFISA annually.|
|4. Option to hold multiple P2P Investments in one IFISA (Note: Only with 3rd party providers).||4. P2P lending is not a liquid asset so withdrawing funds during a loan term is not possible.|
Note: P2P lending is not covered by FSCS, your interest & capital are at risk.
How Can You Setup an Innovative Finance ISA?
|STEPS TO GETTING AN IFISA|
|1. Spend time learning about the risks involved, for new investors in the P2P asset class is it is important to recognise this is not a savings product, and therefore there is a degree of risk.|
|2. Research which P2P platforms are currently authorized by the FCA as providers of the IFISA (OFF3R will soon be launching an IFISA Channel to facilitate this).|
|3. Based on these authorized platforms, compare and research which platform is best for you, based on your risk appetite and how much you are wanting to invest.|
|4. Become an investor and begin earning returns on the best interest rates currently available.|
- based on the 9 platforms that make up the index