Introduction to ISAs
The Individual Savings Account (ISA) has been around since 1999 and has enabled eligible investors to invest part of their savings into a tax-free scheme. ISAs have evolved to suit the needs of more people looking to invest and save for their future.
ISAs are offered by banks, insurers, asset managers and building societies, which makes it accessible to many investors.
To be eligible for any ISA investments, you must be over the age of 18, a UK resident, and must have a valid National Insurance number. Many ISA accounts, such as Cash or Instant, can be opened with £1, and the tax-free allowance per tax year is £20,000, which can be distributed among several different types of ISAs.
What are the different types of ISA currently available?
There are several types of ISAs available, which enable you to invest in different ways:
Similar to a savings account, however the interest earned will not be taxed.
Instant Access ISA
This method of ISA allows you to withdraw or add funds to your ISA account throughout the year. The downside is that the interest rate is variable, which means that your expected returns could rise or fall.
For long term savings strategies, a fixed-rate ISA is often the popular option. Your savings are tied up for a period between one and five years, producing a higher interest rate. The longer the funds are tied up, the better the interest rate you will receive. The downside is that it is not very flexible, and you could incur a penalty if you withdraw all/part of your savings before the term ends.
Regular Savings Cash ISA
Usually a one-year period, this option offers fixed interest, providing that you make a regular contribution into your account. Like fixed-rate ISAs, you may face a penalty if you withdraw your funds earlier.
Help to Buy ISA
This is geared towards for first time property buyers, to help people get on the housing ladder. In a help to buy ISA, the government will give you £50 for every £200 contributed into the ISA, to a maximum of £3,000.
This option is available for under 40’s; for every £4 contributed into the ISA, the government will add £1 to a maximum of £4,000, which could give you an annual bonus of £1,000.
Stocks and Shares ISA
In this type of ISA, all capital gains and income are barred from being taxed.
In April 2016, the UK government launched the Innovative Finance ISA (IF-ISA or IFISA), as a way for eligible investors to use their ISA allowance to invest in P2P markets and other crowdfunding schemes whilst still receiving tax-free capital gains and interest. The UK government has been active in the peer-to-peer market for some time, having made their first investment of £20m of loan capital through Funding Circle, which resulted in £130m of loans made to other businesses; as each loan was repaid, the funds became available for other credit-worthy businesses.
The most recent, high-profile investment made by the government was £40m, which is forecasted to result in £450m being lent out to businesses over time. This support into the P2P market by the government has proven the benefits of investing in platforms, for both investors and borrowers.
The main draw towards IF-ISA is the expected returns, which average between 6-8% p.a.. The higher interest rate can be partially attested to the risks associated with P2P lending. In addition, IF-ISA investments in P2P lending are not protected by the Financial Services Compensation Scheme (FSCS), unlike many other ISAs mentioned above.
IF-ISA providers aim to produce a higher return for investors by cutting out the middle man, the bank, by directly linking investors/lenders to borrowers, who can be individuals using personal loans, small businesses or property developers with property loans.
It is important to point out that the IF-ISA only extends to FCA regulated and approved lending platforms, where investors are investing in debt, and will pay interest, which will not be taxed. The IF-ISA only extends to debt products and excludes equity-based investing.
CrowdLords has been primarily an equity-based investment platform, and we’ve recently entered the debt market, starting with our Elliot House 1st Charge Loan, and more recently the Airspace Mezzanine Loan in Putney. We will be launching our IF-ISA product in the next week or so, as a way for our Investors to diversify and have the potential to earn income in a tax-free environment.
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