An Innovative Finance ISA allows an individual to make peer to peer lending investment with a tax-free wrapper. This way, any interest that is earned is not subject to tax, and it doesn’t count towards a person’s Personal savings allowance. It is important to know that there is a limit on the amount you can subscribe to ISAs every tax-year, called the annual ISA limit, which for 2019/20 is £20,000. You can invest the whole personal allowance in an IFISA or spread it across different ISA types.
Also, you can transfer your existing ISAs funds into an Innovative Finance ISA. Savings allowance from the past tax year doesn’t count towards the current year’s annual ISA allowance. Hence, Innovative Finance ISA is a good way to grow your investment and maximize the returns. Remember that IFISA providers’ rates are usually around double compared to the rates of Cash ISA providers.
Regular peer to peer lending vs. Innovative Finance ISA
The p2p lending mechanics within an IFISA are generally the same as those behind the regular peer to peer lending. Regardless of which product you pick, your funds will be invested in the same way. This means you can expect the same risks and similar interest rates, similar features and benefits. However, it’s always better to check with every provider.
The ISA rules mean that there are some differences between these products:
The annual ISA allowance and your current ISA products can limit the amount you can contribute to an Innovative Finance ISA. Usually, there is no limit on what you can invest in a non-ISA peer to peer investment. Any interest that you earn through an Innovative Finance ISA account will never be taxed, while non-ISA peer to peer returns might be subject to income tax. However, this depends on different conditions, like whether you have used your annual allowance.
Furthermore, you can transfer Innovative Finance ISA funds to other ISA products in coming tax years without subscribing to your annual allowance at the time. This further shelters your money from taxation. On the contrary, the cap on the amount you can subscribe to p2p might prevent you from transferring all non-ISA peer-to-peer funds into an ISA product.
So, should you invest in an IFISA, or p2p lending, or a combination of both? The right decision will depend on whether an Innovative Finance ISA is right for you. It may be best to speak to a financial advisor if you need help in making a decision.
Who offers IFISAs?
There are a lot of providers available on the market offering Innovative Finance ISAs. According to law, each Innovative Finance ISA provides must be authorized by the Financial Conduct Authority (FCA). So make sure that the provider you choose is authorized.
IFISA providers allow you to lend funds to individuals, property developers, businesses, or other projects, and enjoy interest within tax-free wrapper. There is a lot of diversity within the Innovative Finance ISAs, and as the industry continues to evolve, the wide range of choices available to investors is going to increase.
Nearly every provider specialises in some p2p lending. The types of loans vary and affect the interest rates that are offered. The IFISA providers, who offer extremely high rates, make riskier investments or might not diversify your funds across different loans.
Some of the common types of loans the Innovative Finance ISA providers specialise in include:
- Business loans: some peer to peer lenders offer loans to businesses. These loans can be secured or unsecured. The interest rates can be high, but this happens because these loans are available to enterprises that have a high risk of default. Investors can achieve diversification but not as they can with consumer peer to peer lending.
- Consumer loans: a lot of peer to peer lenders provide loans to consumers. Usually, these are unsecured loans. With such loans, investors can diversify their funds across multiple loans. The market for these loans is very stable.
- Property loans: a few peer to peer lending firms offer property loans. These can vary in risk from project to project. For example, buy-to-let lending is comparatively less risky than funding a property development from scratch. These types of loans are secured against property. Investors cannot diversify funds as they can with consumer loans.
The Innovative Finance ISA is not exclusive to p2p lending. At this time, the peer to peer lending industry continues to dominate the ISA category.