How will transferring old ISA funds into a new IFISA work?
One of the most commonly asked questions we are fielding at the moment is with regards to transferring funds from pre-existing Cash and/or Stocks & Shares ISAs into a new Innovative Finance ISA (IFISA) when they go live from 6 April 2016. How will this work? What will the limit be? How many IFISAs can be opened within each financial year, and with how many different peer-to-peer lending (P2P) platforms?
We should first make it clear before elaborating on these hugely pertinent queries that the relevant legislation with respect to IFISAs is still in draft with HM Treasury, as is draft FCA Rules and HMRC ISA Manager Guidance, so much of what is said below may be subject to change. But notwithstanding that important preface, it should make for encouraging reading if you’re a current or prospective P2P investor.
How will transferring money into an IFISA work?
It is now almost certain that there will not be a mechanism for investors with peer-to-peer lending platforms to transfer pre-existing P2P loans with their provider into a new IFISA once they are available. Although still to be confirmed, this is an industry-wide ruling, and Lending Works’ hands are essentially tied. What’s more, you will only be able to contribute new funds into one IFISA, held with one P2P lending platform up to the annual allowance of £15,240 for the next financial year (2016/17).
However, funds accumulated within ISAs from a different category over previous financial years, as it stands, appear to be eligible for transfer to an IFISA, with no upper limit. So this means that if you have saved, say, £100,000 in a Cash ISA with a bank over time, it will all be classified as ‘old’ ISA funds come 6th April, and, after that, you will be able to transfer some or all of this money into one or more IFISAs, spread across multiple platforms if you choose. And earn interest at the respective platform’s rates on all of it!
The important distinction here is between ‘old’ and ‘new’ ISA funds. The latter is subject to the limits explained above, while the former is not – provided this money retains its ISA status at all times. So this means that you need to ensure that when transferring ‘old’ funds from a Cash ISA to an IFISA, you do NOT do so via a standard current or savings account, as this money will then lose its ISA status.
And in the case of transferring pre-existing money from Stocks & Shares ISAs, it is important to note that we as a platform cannot accept transfers in the form of stocks and shares themselves. These investments will need to be converted to cash within the S&S ISA itself; after which it will need to be arranged with your ISA manager to send this money directly to your Lending Works IFISA – subject to the necessary terms and conditions.
How will my lending account work?
The below diagram provides a rudimentary functional overview of how a lender’s online dashboard with us will appear (NB: for illustration purposes only, and not an exact replica of your dashboard). Essentially, all lenders will still only have a single account with us; whether they have both non-ISA lending capital and an IFISA with us, or not. However, the account itself will subdivide into two sections: An IFISA and Non-IFISA component.
The non-IFISA section within your lender dashboard, in terms of layout and function, will not change from what it currently is. However, the IFISA section will be added to your account, and comprise both a cash element (Wallet) and a non-cash element (On loan) – thus making it somewhat similar in complexion to a Stocks & Shares ISA. So, when transferring money from a Cash ISA or S&S ISA to an IFISA with us, it will need to be arranged for the funds to be transferred directly into the cash element of the IFISA section. Do not transfer the money into the non-IFISA section yourself, as your money will then lose its ISA status.
Once this money has arrived in the cash area of your IFISA section (IFISA Wallet), you will then need to move this money across to the non-cash area in order to lend these funds out (remember, money within the cash element of your IFISA will not earn any interest). All borrower repayments from funds lent within your IFISA will then automatically be returned to your IFISA Wallet, from which point you can re-lend these (Auto Lend), take them as an income direct to your bank account (Auto Income) or simply leave them in this Wallet while pondering your next move. Again, remember if you take the Auto-Income option the funds will be transferred to your bank account and will lose ISA status.
It is also worth noting that if you had transferred some or all of the £100,000 in pre-existing ISA funds from the earlier example into our platform, but decided you wished to take it to another P2P platform – or different ISA category entirely - during the same financial year, you would be perfectly entitled to do so (subject to any fees or charges with the platform(s)) up until the time the funds you lent are matched.
A positive outcome amid the complex maze
Have we lost you yet? Hopefully not! Certainly, the legislation is fairly complex, and wading through the jargon and ascertaining what is old but still applicable, what is superseded, which regulations are modifying the new regulations, what is law and what is draft, is enough to give even the sharpest mind a headache. And given that much of it is still in draft and under consultation, there is potential for the lines to become ever-more blurred, or even change entirely.
Yet, as it stands, the information laid out here should provide useful guidance to you in your decision making with regards to investing your ISA allowance for the coming financial year. If the final regulations follow suit with the various draft legislation, you as an investor will have excellent scope to use as much or as little of your cumulative ISA funds from years gone by to reap the full benefits that the Innovative Finance ISA will bring. And, as ever, we will be on hand to bring you up to speed with any further developments; as and when they occur.
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- Setting up your IFISA: What you need to know
- Your updated guide to Innovative Finance ISAs
- Innovative Finance ISA: The force to awaken P2P lending
- Cash ISA returns: The shame of high-street banks
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