Setting up your IFISA: What you need to know
Last week, we blogged on the status quo of regulations for the transfer of funds held in accounts within other ISA categories into the new Innovative Finance ISA (IFISA), which we hope clarified a number of ambiguities. More importantly, we trust that it made you aware of the fact that there doesn’t appear to be a limit on the amount you can transfer from ISA funds accumulated over past financial years into an IFISA, nor the number of peer-to-peer lending platforms with which you can set one up in order to accommodate these ‘old’ ISA funds.
The important distinction here is that these monies referred to above were accumulated in previous tax years, and are thus not subject to the restrictions and limitations of the annual individual ISA allowance. So just what exactly are these restrictions then, and what finer nuances are involved with respect to IFISAs? That’s what today’s article will seek to clarify for you…
The ISA allowance and IFISA transfers
Every resident of the United Kingdom is entitled to an individual tax-exempt ISA allowance for the financial year, which runs from 6 April to 5 April. For the 2016-17 year, this subscription limit has been set at £15,240, which can be dedicated to one, or spread across all three, of the ISA categories – namely Cash ISAs, Stocks & Shares ISAs and Innovative Finance ISAs.
However, although you are able to make use of all three ISA types if you wish, you will only be able to subscribe funds to one account within each ISA category per tax year. Remember, ‘subscription’ refers to the allocation of ‘new’ ISA funds, or funds which did not have ISA status in previous financial years. So this means that if you wish to subscribe some or all of your allowance to an IFISA in the 2016/17 tax year, you would only be able to do so with one account, held with one P2P lending platform.
But that’s not to say you’re stuck with one platform for the duration of the year if you have a change of heart. Say, for example, you subscribe £5,000 to an IFISA with Platform A, but later notice that Platform B is offering better rates, and decide you would like to switch. You will be perfectly entitled to do so, provided that you transfer the full £5,000 to Platform B and the transfer is effected in cash (funds on loan cannot be transferred). That’s because, unlike the case of old ISA funds accumulated over previous tax years, you are not allowed to transfer PART of these newly-subscribed funds. You will also not be able to subscribe any more “new" funds to Platform B for the current financial year; even if you have not used your ISA allowance.
Other scenarios pertaining to changing IFISA provider
Here’s another quirk relating to changing platforms with regard to your IFISA. If, as per the example above, you have subscribed £5,000 to an IFISA with Platform A, but are so enamoured by the offerings of an IFISA with Platform B that you decide you want to allocate, say, £10,000 to it. In this case, you will need to first subscribe an additional £5,000 to the IFISA with Platform A, before transferring all £10,000 of it across to an IFISA with Platform B.
This is because you will only be allowed to subscribe funds to one IFISA within each tax year, and, having already contributed £5,000 to the one with A, you will not be able to subscribe any new funds to the one held with B – only transfer money into it.
There is another workaround too. If you have contributed £5,000 in new funds to an IFISA with Platform A as above, but want to subscribe to one with B instead, you could move the aforementioned £5,000 to a Cash (or Stocks & Shares) ISA. Once these monies have been moved to a different ISA category, the previous subscription to the IFISA will be voided, and these funds will be considered to have always been subscribed to the Cash ISA. This would then leave you free to subscribe any or all of your remaining ISA allowance – assuming you have not used it all up elsewhere – to an IFISA with Platform B.
Funds in the IFISA Wallet, funds on loan and right to withdraw
For the purposes of the ISA allowance, it matters not whether the funds you transfer into an IFISA have been lent out or not. So that means if you subscribe £10,000 into the cash element of your IFISA (‘IFISA Wallet’ in the case of Lending Works), this will exhaust £10,000 of your ISA limit, regardless of whether your funds are on loan or not.
However, every customer will be entitled to a statutory 14-day right of withdrawal. So this means that for two weeks after you have subscribed funds to an IFISA, you will be able to withdraw all of them free of charge. And if you decide to exercise this right, it will also restore your ISA allowance to what it was before the subscription, as the transaction will be deemed to have never taken place.
Also, as per the earlier examples of transferring subscribed funds from one P2P lending platform to another, it is important to note that all transfers into and out of Lending Works IFISAs will only be done with cash. So that means that any funds which are on loan will first need to be withdrawn (Quick Withdraw in the case of Lending Works). Once the loan contracts have been taken over by another lender, and the equivalent value converted into cash within your IFISA (Wallet), you will then be able to transfer these ISA funds in or out of the peer-to-peer lending platform.
A new adventure, with learnings along the way
We need to once again reiterate that the relevant legislation discussed here with respect to IFISAs may be subject to change, as it remains in draft with HM Treasury, along with draft FCA Rules and draft amendments to HMRC ISA Manager Guidance. But we do not expect any radical changes, and anticipate that the position we have set out above will be the guiding light as we set sail on this exciting new chapter in the peer-to-peer lending sector.
Innovative Finance ISAs are as new to us as they are to you, and there may be a curve ball or two along the way. But you can rest assured that we’ve covered every base from our end that we possibly can, and will be well poised to bring you this game changer for investors in a clear and simple manner, while keeping you informed every step of the way.
- Your updated guide to Innovative Finance ISAs
- Cash ISA returns: The shame of high-street banks
- How will transferring old ISA funds into a new IFISA work?
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