Your updated guide to Innovative Finance ISAs
The meteoric rise of peer-to-peer lending (P2P) in the UK has seen the industry double in size to £7 billion during 2016. This has firmly changed the question on investors’ lips from “What is P2P lending?” to “Which platform should I choose?"
The elevation into the mainstream is now complete with the introduction of the new Innovative Finance ISA (IFISA), which went live on 6 April 2016 and allows lenders investing in peer-to-peer loans to shield interest earned on these from tax, provided that they are held within this IFISA.
We continue to field calls and enquiries on a daily basis querying all aspects of the new IFISA, such as how it will be implemented and the rules surrounding it. So, we thought we’d bring you up to speed with some useful answers to some of the most commonly-asked questions we've encountered…
What is an Innovative Finance ISA?
After years of campaigning, the peer-to-peer industry landed the ultimate coup as it was confirmed by the Treasury that, from the 2016/17 tax year, savers and investors will be able to allocate some or all of their annual ISA allowance (£15,240 for the 2016/2017 financial year) to the new IFISA. The IFISA became the third ISA category, alongside the existing cash ISA and stocks & shares ISA, and sits somewhere between the two in terms of risk and reward.
The possibility that equity crowdfunding could be included within the IFISA is ongoing, but as it stands peer-to-peer lending platforms are the sole providers of the product. One thing that must be remembered is that, unlike a cash ISA, there is no cover from the Financial Services Compensation Scheme for money held within an IFISA.
Am I able to transfer my existing ISA money into an IFISA?
Absolutely. If you already have money in a Cash ISA there is nothing stopping you from transferring it into your new IFISA. This also applies to Stocks & Shares ISAs, provided of course the stocks and shares are converted into cash first (eg: by selling them). These transfers will not impact your ISA allowance for the current tax year. Your ISA allowance as a whole can be spread across each of the ISA categories - Cash ISAs (which includes Help to Buy ISAs), Stocks & Shares ISAs and IFISAs. What's more, there is no upper limit to the amount you can transfer from pre-existing ISA monies, accumulated over previous financial years - nor on the amount of IFISAs you have with different P2P platforms in order to house these 'old' funds. You can read more about this by clicking here.
But remember that you can only subscribe new funds with one ISA manager within each category in the same financial year, though you can choose how much of your annual ISA allowance you want to allocate to each one.
Will I be charged a fee for opening my IFISA, and are the rates the same?
No. We do not charge a fee for opening an IFISA with Lending Works. So, whether you choose to make use of the new ISA wrapper or not, you will not incur any fees for lending.
In keeping with the above, we can also confirm that the usual lender rates also apply to P2P loans within the new tax-free ISA. Of course, as a marketplace, our rates are subject to weekly updates, but we see no reason why those making use of the ISA wrapper should be offered an inferior rate to those who aren't.
Will I be able to transfer my existing P2P loans into an IFISA?
The short answer is no. It is something which was discussed at length during an HM Treasury and FCA consultation, but government legislation has put an end to any hopes for those hoping to transfer existing P2P investments into the new IFISA wrapper.
Are there any workarounds for transferring my existing P2P loans into an IFISA?
The only available option as the legislation currently stands would be to exit your existing loans and buy new loans within an IFISA (Quick Withdraw in the case of Lending Works).
If you are an existing lender, using Quick Withdraw, of course, would incur a fee of £20 or 0.6 per cent of the amount withdrawn - whichever is higher. Another alternative would be to make use of our Auto Income tool for your non-ISA loans, and set it such that both interest and capital repayments are returned to your account. This way, you could then drip feed this money into your new ISA; free of charge.
What is the Personal Savings Allowance (PSA), and how can I use it to my advantage?
As mentioned above, you’ll be free to transfer existing funds from your Cash and/or Stocks & Shares ISA to your new IFISA. However, it’s worth considering whether to first make use of your Personal Savings Allowance. With the PSA, basic-rate taxpayers will be able to shield interest (on savings accounts and peer to peer loans) of up to £1,000 per year from tax, while for higher-rate tax payers this figure drops to £500. So for a higher-rate tax payer, you’re looking at shielding a capital amount of roughly £10,000 from tax via the PSA alone, before even starting to use your ISA allowance. Bear in mind too that returns from Stocks & Shares ISAs will not be eligible for the PSA.
For more information on the Personal Savings Allowance, please click here.
What effect will the ISA have on the P2P industry?
In the short run, it is anticipated that the P2P sector will rocket to £50 billion by 2020 as a result of IFISA (and, to a lesser extent, the Personal Savings Allowance). And in the long run, there is every chance that this exponential growth will continue. The basis for long-term success for both platform and investor through the IFISA is solid foundations. We’ve been putting ours in place, one brick at a time. And we’re now excited for you to start reaping the benefits!
- The ultimate guide to the Innovative Finance ISA
- Innovative Finance ISA: The force to awaken P2P lending
- Cash ISA returns: The shame of high-street banks