What is an Innovative Finance ISA? IFISAs explained
An Innovative Finance ISA (IFISA) allows you to make peer-to-peer (P2P) lending investments within a tax-free wrapper. This means that any interest earned within this wrapper will not be taxed and will not count towards your Personal Savings Allowance.
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There is a cap on the amount you can subscribe to ISAs each tax year, known as the annual ISA limit — this is £20,000 for 2018/19. This allowance can be fully invested in an Innovative Finance ISA, or spread across the different types of ISA.
You can also transfer funds from existing cash or stocks and shares ISAs into an IFISA. ISAs from previous tax years do not count towards this year's annual ISA allowance, so this is a good way to increase your overall investment and therefore maximise your returns.
Innovative Finance ISAs are managed by P2P lending platforms rather than traditional financial institutions such as banks or building societies, so their running costs are typically much lower. These savings are typically passed onto investors in the form of higher returns and lower fees.
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Like any form of investment, Innovative Finance ISAs do involve an element of risk: borrowers may default on their loans, and contributions are not covered by the Financial Services Compensation Scheme (FSCS). However, P2P platforms offer investors different ways to reduce these risks - Lending Works, for example, provides the Lending Works Shield to help protect investors.
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Any UK taxpayer over the age of 18 is eligible to open and subscribe to a maximum of one Innovative Finance ISA each tax year. They are only available through certain FCA-regulated P2P lending platforms, such as Lending Works.
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Innovative Finance ISAs vs Regular P2P lending
The mechanics of the P2P lending within an Innovative Finance ISA are usually the same as those behind the platform's regular P2P lending service. In other words, whichever product you choose, your money will ultimately be invested in the same way. This means that you can expect the same rates and risks, and similar features and benefits — although it is best to check with each provider.
However, the ISA rules mean that there are always a few key differences between these financial products:
- The annual ISA allowance and your holding of other ISA products limits how much you can contribute to an IFISA, while there is usually no limit to what you can invest in P2P.
- Interest earned through an IFISA is never taxed, while non-ISA P2P returns may be subject to income tax. This depends on a number of circumstances, such as whether you have utilised your Personal Savings Allowance. Read our advice on P2P income and tax or view government guidance for more information.
- IFISA funds can be transferred to other ISA products in future tax years, without contributing to your annual ISA allowance at the time, further sheltering this money from taxation.
So, should you invest in an Innovative Finance ISA, peer-to-peer lending, or a combination of the two? The best investment decision depends on your personal circumstances, so speak to an independent tax or financial advisor if you need some help.
It is important that we highlight that, as with all investments, your capital is at risk.