What are the main differences between IFISAs and Cash ISAs?
In a nutshell?
The Innovative Finance ISA (IFSA) expands the ways you use your savings tax-free that might before have been held in Cash ISAs or Stocks and Shares ISAs. It gives you the opportunity to manage your savings in ways that Cash ISAs and Stocks and Shares ISAs don't, although the risks of losing your investment are higher.
All ISAs pay 100% tax-free interest. But there is a limit on the amount of money you can put into an ISA to receive tax free interest on it. The annual limit is £20,000 from 6 April 2017 to 2019-20. If you don't use your annual allowance before 5 April of each tax year you lose it.
So how does the Cash ISA compare to the new IFISA? Unlike Cash ISAs, IFISAs let you lend your savings to borrowers through alternative finance crowdfunding lenders like CrowdLords. Like other ISAs, interest and capital gains this lending is tax-free. IFISA investors using the CrowdLords platform lend to a special purpose vehicle (SPV) in return for a bond, and the SPV lends the money to a business - which uses the funds to finance their project.
A third "flavour" of ISA, the Innovative Finance ISA (IFISA) expands the ways in which people can use their savings tax-free that they previously might have held in cash, the Cash ISA, or in stocks and shares, the Stocks and Shares ISA. And it gives them the opportunity to manage their savings in ways that Cash ISAs and Stocks and Shares ISAs don't.
A Cash ISA or "Cash Individual Savings Account" pays 100% tax-free interest. They typically last for less than five years and pay interest on savings at a fixed or variable rate. This is opposed to standard savings accounts on which you might pay tax - for example: fixed rate bonds, notice savings or easy access accounts.
There are two main difference between Cash ISAs and these traditional savings accounts. The first is that you are limited to the amount of money that you can put into a Cash ISA in order to receive tax free interest on it. Each tax year the government sets this annual limit. It was set at £20,000 across all ISA categories from 6 April 2017 - and has been fixed at this level through to (and including) 2019-20.
The second is that if you don't use your annual Cash ISA allowance before 5 April of each tax year you lose it.
So how does this compare to the new IFISA?
Unlike Cash ISAs and Stocks and Shares ISAs, IFISAs allow you to lend your savings to borrowers through alternative finance platforms such as crowdfunding lenders. Just like other ISAs this lending still receives interest and any capital gains tax-free. And just like other ISAs if you don't use your annual allowance before 5 April you lose it. It should be noted, however, that as with all crowdfunding investments, investing in an IFISA puts your capital at risk and returns are not guaranteed.
So how do CrowdLords IFISA accounts work?
IFISA investors become lenders of their savings capital in their own right. Using a crowdfunding platform like CrowdLords, they lend to a special purpose vehicle or SPV in return for a bond, and the SPV lends the money to a business - which uses the funds to finance their project. The potential returns generated by these lending activities are held in a tax-free ISA wrapper.
It is possible to combine ISAs across the £20,000 annual ISA allowance. A typical investment scenario in 2019 might be:
£5,000 invested in a cash ISA
£5,000 invested in a stocks and shares ISA
£10,000 invested in an innovative finance ISA
There are, however, no upper limits on transferring previously existing Cash ISAs (i.e. those from previous years) into IFISAs entirely.
The new IFISA is available to UK taxpayers aged 18 or over. The UK government has no immediate plans to introduce a so-called "junior IFISA" for the under-18s.
Rates offered by IFISA providers can be around double the rates offered by cash ISA providers, particularly because crowdfunding lending cuts out the traditional bank, the "middle man", which means borrowers generally pay less in interest and investors receive more.
Non-traditional lending is not without risk. Higher rates of interest come with a higher risk profile. Unlike a UK bank or building society account, crowdfunded lending is not currently protected by the Financial Services Compensation Scheme (FSCS). As with all investment-based crowdfunding activity, investor capital is at risk, meaning some or all of the money could potentially be lost, and returns are not guaranteed.
But despite the risk involved, the financial industry has spoken. Investors are moving billions of pounds into this alternative finance model. And real estate investments and property development projects are proving particularly popular.
The Cambridge Centre for Alternative Finance (CCAF) - as part of its annual UK Alternative Finance Industry Report published in November last year said the volume generated by Real Estate Crowdfunding increased almost 200 per cent from £71m to £211m between 2016 and 2017. Alternative finance lending is taking the finance industry by storm - be a part of it before April 5th!
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