Innovative Finance ISA - FAQ
In a nutshell?
The IFISA was introduced by the UK government in April 2016. It is a new "tax wrapper" which will allow eligible UK investors to lend money using FCA-regulated crowdfunding and peer-to-peer (P2P) lending platforms. The new IFISA is available to UK taxpayers aged 18 or over.
The new IFISAs allow savers to become lenders and potentially earn tax-free interest on these lending activities. The P2P lending model allows investors to lend to individuals and small businesses. The crowdfunding model sees an investor buy and hold equity or debt.
The combined annual ISA allowance is £20,000, fixed until and including the 2019/20 tax year. The UK government has stated that IFISA interest and capital gains will be tax-free.
- What is the Innovative Finance ISA (IFISA)?
- Who is eligible to take out an IFISA?
- How does the IFISA compare to traditional ISAs?
- How does this kind of financial product differ from P2P lending?
- What are the new limits regarding IFISAs and ISAs?
- How is P2P lending income taxed?
What is the Innovative Finance ISA (IFISA)?
The Innovative Finance ISA (IFSA or IF-ISA) is a new "tax wrapper" that gives eligible UK investors the ability to lend their savings to businesses in search of funding through FCA-regulated crowdfunding and peer-to-peer (P2P) lending platforms.
Interest earned from these loans are tax-free. IFISAs were introduced by the UK government in April 2016. They operate alongside the established Cash ISA and Stocks and Shares ISA system – and use similar rules.
For example, the annual £20,000 ISA investment allowance can be used in whole or in part using IFISAs. Rates of return offered by IFISA providers can be several times more than those offered by Cash ISA or Stocks and Shares ISAs.
This is because alternative finance lenders such as crowdfunding platforms cut out traditional banks – the middle man – which means borrowers pay less in interest and investors have the potential to receive more. It is also because the investments crowdfunding platforms facilitate are considered to be higher risk than Cash or Stocks and Shares ISAs. Investors should be aware that they are at risk of losing some or all of their investment, and that returns are not guaranteed.
Who is eligible to take out an IFISA?
The new IFISA is available to UK taxpayers aged 18 or over. The UK government has said it has no immediate plans to introduce a so-called "junior" IFISA for the under-18s. The new IFISA is likely to attract a different kind of investor to that associated with traditional ISAs.
An IFISA is an active investment, whereas investments in cash or funds (i.e. through Cash ISAs or Stocks and Shares ISAs) are more passive. The new IFISA is likely to appeal to professionals, entrepreneurs and experienced property investors who are comfortable with financial planning in their businesses and careers – and who can bring that critical awareness to a new kind of investment opportunity for their own wealth management plans.
How does the IFISA compare to traditional ISAs?
The new IFISAs allow savers to lend money to businesses and to potentially earn tax-free interest on these lending activities.
In the crowdfunding IFISA model operated by CrowdLords, individuals signed up to the platform open an IFISA account with CrowdLords and use it to lend to a Special Purpose Vehicle (SPV) in return for a bond. The SPV then lends the money to the property owner or real estate developer, which arranges security against the bond.
This is in marked contrast to Cash ISAs and Stocks and Shares ISAs – both of which often offer both lower yield and lower risk. Investment in IFISAs comes with certain risks, including the loss of some or all of your investment, and should be viewed as an actively managed investment both by the lender and the crowdfunding platform. The current, combined, annual ISA allowance of £20,000 across all ISAs will remain in place until the 2019/20 tax year.
How does this kind of financial product differ from P2P lending?
In the alternative finance industry crowdfunding and peer-to-peer (P2P) lending are often grouped together, but there are differences between them that investors should be aware of.
The P2P lending model allows investors to lend directly to individuals and small businesses. Money is matched with an individual or business looking to obtain a loan.
The crowdfunding model sees an investor buy and hold equity or debt in a business instead. Equity crowdfunding platforms tend to be particularly attractive to sophisticated investors with solid financial knowledge under their belts.
What are the new limits regarding IFISAs and ISAs?
Current regulation allows eligible UK investors to have one cash ISA, one stocks and shares ISA and one IFISA, and investors are not permitted to open more than one ISA in each class in a given tax year. Investors should also take care not to exceed the overall annual ISA allowance. The combined annual ISA allowance was increased from £15,240 to £20,000 from the 2017/18 tax year through to 2019/20.
How is P2P lending income taxed?
Interest and capital gains received via an IFISA are tax-free as regulated by the UK government. But tax may still be due on lending interest received via alternative finance lending platforms if that lending is not through an ISA or if it is in excess of the annual ISA £20,000 protected limit.
As an example, without an IFISA a £10,000 portfolio of crowdfunding loans might yield 10% interest and a gross interest return of £1,000 per annum. This would incur a basic tax at 20% (£200).
Higher rate taxpayers would be expected to pay 40%-45% (£400-450). With the IFISA, income obtained in P2P or crowdfunding platforms are ring-fenced in a tax-free "pot". In the example given here there would be no tax to be paid on the £1,000 interest received.
Please note: this example is provided for illustrative purposes only.
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