We explain how the Innovative Finance ISA (IFISA) works, what rates are available and who's offering the best rates.
What is an Innovative Finance ISA?
The Innovative Finance ISA or IFISA allows savers to shield the money they make by investing in peer-to-peer loans from tax.
The product was given the green light in the 2015 Budget and now firms with regulatory permission from the FCA and ISA manager status are able to provide IFISAs.
Investors can now spread their annual tax-free savings allowance, currently £20,000 in 2018/19, between a Cash ISA a Stocks & Shares ISA and the new IFISA, however they like.
Like a Cash ISA or Stocks & Shares ISA you will only be able to invest in one IFISA each tax year.
You will also be able to transfer existing ISA funds from previous years into an IFSA and as well as being free of Income Tax there is no Capital Gains Tax to pay on returns.
How does peer-to-peer lending work?
Peer-to-peer platforms allow you to lend money direct to people or businesses in need of a loan.
As there is no middleman taking a cut in the shape of banks or building societies the rates tend to be much better for both sides.
Peer-to-peer lending has grown in popularity with investors looking for better returns on their cash that are willing to take on some risk.
However, usually if you invested in peer-to-peer you had to pay interest on your returns by filling in a Self-Assessment tax return.
But now platforms that offer the IFISA will allow you to make investments up to your annual ISA allowance tax-free.
How to invest in an IFISA
Here are the providers offering the IFISA:
- Basset & Gold
- Crowd for Angels
- Funding Circle
- HNW Lending
- Lending Works
- Property Crowd
- UK Bond Network
Rates can vary dramatically so make sure you shop around before you sign up.
What rates are on offer?
Lending Works, which allows investors to lend to individuals is offering rates up to 6%.
Zopa offers rates of up to 4.6% on its IFISAs and on RateSetter you can earn up to 5%.
Peer-to-peer platforms which allow you to help finance loans to help businesses offer greater returns.
Crowd for Angels, which is a crowdfunding platform that raises cash for companies wanting to expand, diversify or develop their business through crowd bonds and shares says its IFISA offers returns of 12%.
Crowd2Fund, which helps businesses get funding, says investors can earn 8.7% APR on average after fees and bad debts in its IFISA.
Crowdstacker, which also helps businesses get investment, will offer up to 7% over a choice of terms. Rather than encouraging investors to spread risk by investing in lots of different business it encourages investors to pick a business opportunity.
Funding Circle's IFISA has projected returns of 7.2%, or 4.8% if you opt for the conservative option.
Meanwhile peer-to-peer platforms offering the chance to help fund property purchases also offer attractive rates.
Landlord Invest is offering rates of up to 12%, Relendex offers returns of up to 10% and Landbay has a deal earning investors 3.54%.
What you need to know before you invest
Investing in an IFISA is riskier than putting your money in a Cash ISA.
That’s because borrowers could default on their loans and as result you could lose all or some of the money you put in.
Peer-to-peer platforms normally will have a way of choosing credit-worthy borrowers and you will usually be encouraged to split your investment between lots of different borrowers to spread the risk.
Also, some peer-to-peer firms like Lending Works and RateSetter have a provision fund, which could pay out in the event of bad debt.
However, you should be aware that the money you invest in an IFISA won’t be covered by the Financial Service Compensation Scheme (FSCS), which protect deposits up to £85,000 should a firm go bust.
What if I’m already a peer-to-peer investor?
Currently regulations state that you can only fund your IFISA with cash rather than assets.
The industry and HMRC are still working out a process for how existing peer-to-peer lenders can start to use the IFISA as well.
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