What is an Innovative Finance ISA? IFISAs explained
Last updated on: 09 March 2020
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.
You may be interested in: What is peer-to-peer lending?
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 2019/20. This allowance can be fully invested in an Innovative Finance ISA, or spread across the different types of ISA.
You can also transfer existing ISAs funds into an IFISA. Savings 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.
According to this IFISA website, "the rates offered by Innovative Finance ISA providers are typically around double the rates offered by Cash ISA providers".
You may be interested in: What are the best ISA rates and how much can you earn?
- Innovative Finance ISAs vs regular P2P lending
- Who provides Innovative Finance ISAs?
- How risky are IFISAs?
- Is an Innovative Finance ISA right for me?
- How to open an Innovative Finance ISA
- How to withdraw from and close an Innovative Finance ISA
- Lending Works IFISA help and FAQ
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 non-ISA 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. On the other hand, the limit may prevent you from transferring all of your non-ISA P2P funds into an ISA product in the future.
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 whether an IFISA is right for you. We recommend that you speak to an independent tax or financial advisor if you need some help with your choice.
Who provides Innovative Finance ISAs?
There are many providers on the market who offer Innovative Finance ISAs. Every IFISA provider must be authorised to do so by the Financial Conduct Authority (FCA). You can search the FCA register here.
IFISA providers offer you the opportunity to lend money to consumers, businesses, infrastructure developments or other projects, and enjoy tax-free interest on repayments in return. There is already a high degree of diversity within IFISAs and, as the sector continues to evolve, the vast array of options available to investors is set to increase.
While nearly all providers specialise in a form of peer-to-peer lending (see our P2P lending guide for information), the type of loan varies and affects the rates offered. This is because IFISA providers who offer extremely high interest rates — sometimes as much as 15% — will probably be making riskier investments or won't be diversifying your money across loans.
Some of the most common loan types IFISA providers specialise in include:
- Consumer: Many P2P platforms offer loans to individuals, often as unsecured loans, and your investment is usually very well diversified across multiple loans. The market for consumer loans is also very stable. This is the type of loan Lending Works specialises in.
- Business: Some P2P platforms lend to businesses — these loans may be secured or unsecured. Rates can sometimes be high, but this is often because the loans are available to enterprises that have more of a default risk. It's possible to achieve some level of diversification, but not at the same level as with consumer P2P lending.
- Property: Some P2P platforms offer property loans, which can vary in risk from project to project — for instance, buy-to-let lending is less risky than financing a property development from scratch. Loans are typically secured against the property, though the same level of diversification can't be achieved as with consumer P2P loans.
The IFISA is not necessarily exclusive to P2P lending, and there is a suggestion that equity-based crowdfunding could be included at some point in the future. However, at this time, the P2P lending sector continues to dominate this ISA category.
Which Innovative Finance ISAs have the best track record?
IFISAs launched in April 2016 and many leading providers launched their product well after this. As such, there isn't much data to work with relating specifically to IFISAs. However, peer-to-peer platforms have been around much longer and, given that IFISAs are almost exclusively offered by these platforms, researching performance within P2P provides the basis for a valid comparison of track records.
The headline rate is one metric to look at, but a more important one is the real (loss-adjusted) returns delivered by a platform after borrower defaults. At Lending Works, we've lent over £200 million so far, delivering consistent returns to investors, so that's a pretty good track record! Take a look at some of our other statistics to get an idea of how we've performed.
You may be interested in: What are the best ISA rates and how much can you earn?
How risky are IFISAs?
Like any form of investment, Innovative Finance ISAs do involve an element of risk: borrowers may default and there is a chance that the platform could go out of business, with unknown consequences for your loans. There is no cover from the Financial Services Compensation Scheme (FSCS) in either case.
However, platforms are required to have in place wind-down arrangements and many have backup service providers who would manage your loans in the event the platform is no longer able to.
Are IFISAs regulated by the FCA?
Peer-to-peer lending platforms must have full authorisation from the FCA in order to provide IFISAs. This is to ensure that adequate protections are in place for customers — primarily lenders/investors, but also borrowers.
FCA authorisation also ensures firms adhere to common rules, and that all services are provided in a clear, fair and not-misleading manner to customers. There are additional regulations in place regarding the handling of client money and complaints procedures.
How do I assess risk among IFISA providers?
There are some key risk indicators to consider when choosing an IFISA provider. Here is a handy checklist of ten questions that you should seek answers to:
- How long has the platform been trading?
- What type of loans do they facilitate?
- Is your investment diversified across multiple borrowers?
- What are their arrears rates?
- What are their default rates?
- Do they offer any safeguards against borrower default?
- Could you be compensated in the event of borrower default?
- Can they provide forecasts on default rates?
- Can you access or transfer your IFISA when needed?
- What happens if the platform goes bust?
It's worth noting that Lending Works displays all historical performance data on its website and allows investors to download the entire loan book. Such transparency gives you the chance to conduct analysis and make an informed decision when choosing an IFISA provider. You can also view our statistics to get a good idea of our track record.
Do providers leverage IFISA investments?
No. Unlike investment banks, IFISA providers allocate money invested by lenders to borrowers on a pound-to-pound basis. No money is therefore created or leveraged, nor is there any form of fractional reserve banking. Such a simple model means there is less exposure in the event of a downturn, and reduced risk to customers (and the wider economy) as a result.
What other risks should I be aware of?
The level of accessibility to your IFISA investment should be taken into account. If you wish to transfer or withdraw your money, it’s important that you are familiar with the process, timings and fees involved.
There is no FSCS protection with P2P investments so your funds are not guaranteed in the event of platform failure, though any money held by the platform itself should be ring-fenced in client money accounts so should be held safely.
Are IFISAs worth the risk?
Again, it must be reiterated that IFISA risk profiles vary from platform to platform. But, as a rule, IFISAs are widely accepted to be a midpoint in terms of risk and reward between Cash ISAs and Stocks and Shares ISAs. In fact, most experts would agree that some P2P lending platforms offer a relatively low-risk investment. Unlike putting money into the stock market, investors have enjoyed steady returns from IFISAs to date.
And, while your money isn’t guaranteed in the way it would be if you put it in the bank, almost all Cash ISAs pay returns below the rate of inflation. That means while there is a low-level of risk, this is balanced by the fact that money in an IFISA won't lose its value like funds in a Cash ISA could. Read our guide to ISA rates to find out more about how your money can grow.
Of course, each investor has their own preferences for risk, and doing your homework is important. But the combination of predictable, inflation-beating returns and a simple sign-up process means the IFISA is building an impressive track record.
Is an Innovative Finance ISA right for me?
It's important to think about whether an IFISA is the right product to help you to achieve your financial goals. For instance, if your objective is to simply save your money with as little risk as possible, then you will probably be better off with a Cash ISA. Or, if you are looking to build up a stable retirement fund, then a Lifetime ISA might be the best option. On the other hand, if you aren't averse to a small amount of risk and you want to beat inflation without signing up to a very lengthy commitment, then an IFISA could be right up your street.
IFISAs also offer a good opportunity to diversify your investments, as not only do they offer an alternative to traditional assets, but your cash may well be diversified across a number of loans by the platform, adding further security.
And, if you're conscious about making an ethical investment, placing your money with a P2P platform that specialises in consumer lending will mean you're not investing in an unethical industry, such as fossil fuels or tobacco, and instead providing funding to individuals that can benefit from it. (You can learn about our average borrower here.)
Take the time to consider what it is you actually want to achieve from your investment and decide whether an IFISA can deliver this. Don't forget to consider all the risks when making a final choice.
Do I need the tax shelter of an Innovative Finance ISA?
Firstly, you need to establish whether opening an IFISA is necessary in your circumstances. It's important to remember that, as a taxpayer, you have access to a Personal Savings Allowance (PSA) that allows you to earn interest without paying Income Tax, including interest from P2P lending.
These allowances are:
- For basic rate (20%) taxpayers: £1,000
- For higher rate (40%) taxpayers: £500
- For additional rate (45%) taxpayers: £0
This means that opening an IFISA to protect your investment is only necessary if you will be earning more interest from your P2P investment (and other sources of savings interest) than your Personal Savings Allowance covers.
For instance, a basic rate taxpayer with a PSA of £1,000 who invests in P2P at 5% per annum would be able to put in £20,000 before they would exceed their allowance. In contrast, someone who pays the higher rate would only be able to invest £10,000 before having to pay tax. Note: this example does not consider interest from other sources.
Therefore, whether you need to open an IFISA depends on the rate of tax you pay, how much you will be investing, and the rate of return you will receive. If your total earnings will push you over your Personal Savings Allowance, it's probably worth considering an IFISA.
If you're thinking of investing in peer-to-peer lending, it's also worth remembering that IFISAs can offer quite a few benefits, even if you don't require an immediate tax shelter.
You may be interested in: Tax on savings: How much do you pay?
How to open an Innovative Finance ISA
Opening an IFISA is not a complicated process: there are just three straightforward steps that you need to carry out before you can pay into your account.
- Check you're eligible to open an IFISA: Any UK-resident taxpayer over the age of 18 is eligible to open and subscribe to an IFISA. The provider you're applying through will probably request your National Insurance number to verify your residency.
- Choose an IFISA provider and apply: If you're eligible, you'll need to choose your IFISA provider from those who offer the product and make your application. Remember, you can only subscribe to a maximum of one Innovative Finance ISA each tax year and they are only available through certain FCA-regulated P2P lending platforms, such as Lending Works. Learn more about our IFISA here.
- Begin investing in your IFISA: Once you've successfully applied to an IFISA provider, you can begin to pay into your new account to the limit of £20,000 per tax year. Remember, this cap is for all of your ISA accounts, including Cash ISAs, Stocks and Shares ISAs, and Lifetime ISAs. You can find out more about ISA allowances here.
How to withdraw from and close an Innovative Finance ISA
Most P2P platforms allow you to freely withdraw money from your IFISA account, as long as it's held in cash and not allocated to loans or a lending offer. Many providers also have a "secondary market" that enables you to sell on your loan commitments, giving you the option of accessing your invested cash before the term has ended. However, this may be subject to a fee.
Please note: If you decide to take funds out of your IFISA, you will not be able to replace these again in the same tax year and will lose any tax benefits on these funds.
In terms of closing account, you can usually withdraw all of your funds or transfer your money to a different ISA.
Can I cancel an IFISA if I change my mind?
It's worth knowing that you also have a statutory right of cancellation that allows for a 14-day "cooling-off" period where you can change your mind and cancel your account. This is required by the FCA and written into the terms and conditions of your IFISA.
Lending Works IFISA help and FAQs
If you are interested in opening a Lending Works IFISA or already have one, you can find advice and answers to the most commonly asked questions below. Don't hesitate to get in touch with our customer service team if you need any assistance.
- How to open a Lending Works IFISA
- Withdrawing from a Lending Works IFISA
- Where will the cash in my Lending Works IFISA be held?
- Will I earn interest as soon as funds are placed into my Lending Works IFISA?
- Why do I need to sign a declaration?
- What is an ISA manager?
- What is the difference between the Lender Platform Terms and Conditions and the ISA Terms and Conditions?
- What if I move abroad?
- What happens if I am made bankrupt?
- How to close your Lending Works IFISA
How to open a Lending Works Innovative Finance ISA
Opening a Lending Works IFISA only takes a few minutes. To start earning tax-free P2P returns, simply follow these easy steps:
- Create a Classic lender account, or sign in to an existing account if you are already a lender.
- Click 'Open my ISA' from the top of your lender dashboard.
- Complete the ISA application form.
- Accept the declaration, and click 'Open my ISA' to confirm.
That's it! We'll get back to you very quickly to confirm that your ISA has successfully been opened. Once you have created your ISA, you can log in and add new ISA funds to your account — make sure you're aware of the ISA limits set out by HMRC before you deposit into your IFISA.
Please note: In order to open an ISA with us, you must be 18 years of age and be a UK taxpayer (as defined by the Income Tax (Earnings and Pensions) Act 2003). IFISAs are only available to individuals and not legal entities, such as businesses.
If you think you do not meet the criteria above or do not do so after you have opened a Lending Works IFISA, you must let us and HMRC know immediately. We may ask for proof of any of the above and you will be asked to sign a declaration which we are required to obtain by HMRC.
You may also transfer the following into your ISA:
- Current-year subscriptions placed in an ISA with another ISA manager in the current tax year (subject to limitations); and
- Subscriptions from previous tax years held in any existing ISA(s) with other ISA managers.
Withdrawing from a Lending Works IFISA
You can withdraw funds from your Lending Works IFISA for free at any time, provided they are held in cash (i.e. not part of an allocated lending offer or already on loan).
If you wish to withdraw funds that are on loan, you can do so using our Quick Withdraw facility. This is free with our Flexible product and incurs a 0.5% charge on our Growth product in addition to a charge if the rates on your loans are lower than the current rates for investors.
Where will the cash in my Lending Works IFISA be held?
All funds in your Lending Works IFISA will be held in a segregated client account with a UK bank. We currently use NatWest and Starling Bank for holding client money.
Will I earn interest as soon as funds are placed into my Lending Works IFISA?
No. Unlike a Cash ISA, you will only start earning interest on your funds once they are on loan to borrowers. If you do not make any lending offers within your IFISA, you will not gain any interest.
New ISA subscriptions to your Lending Works IFISA will still count towards your annual ISA limit whether they are on loan or not.
Please note: There can be a lag of up to 14 days from when you make a new lending offer to when your funds are lent under one or more loan agreements. However, funds re-invested are usually re-lent within one business day.
Why do I need to sign a declaration?
When you apply for a Lending Works IFISA, we are required by law to ask you to sign a declaration. You will only need to do this once - provided you subscribe funds to your ISA each tax year.
If an entire tax year passes without any further subscriptions from you, we are required by law to ask you to sign a new declaration. Until you do this, we will not be able to accept any new subscriptions or effect any transfers in or out of your ISA. This will not impact the funds already in your ISA and those on loan, including repayment of capital and interest on those funds.
What is an ISA manager?
An ISA manager is a firm who is approved by HMRC to open and manage ISAs for customers. Lending Works is an ISA Manager. By signing our ISA Terms and Conditions and ISA Declaration you authorise us to be your ISA manager in relation to your Innovative Finance ISA.
What is the difference between the Lender Platform Terms and Conditions and the ISA Terms and Conditions?
The Lender Platform Terms and Conditions govern your membership of the Lending Works platform, access to and use of the platform, the additional services we provide you and our relationship. This covers both your Classic Account and your ISA.
The ISA Terms and Conditions govern the Lending Works IFISA and our relationship as ISA Manager and ISA Investor. There will be some elements of the Lender Platform Terms and Conditions which will be modified by the ISA Terms and Conditions for your ISA.
You should read both of these sets of terms and conditions side by side.
What if I move abroad?
If you move abroad in any tax year, you can still keep your Lending Works IFISA open, however, you will not be able to add any new funds or transfer funds to Lending Works from another ISA Manager, until you return to the UK. Any new funds you have subscribed in the tax year in which you move abroad may need to be removed from your ISA together with any relevant income, even if you made the subscriptions whilst you were still in the UK. You may also need to skip an entire tax year before you are able to subscribe new funds to any ISA again.
You must let us know immediately if, in any tax year, you have been or will be out of the UK for more than 182 days, so that we can determine if you are deemed to be “non-resident”. The period outside the UK does not need to be constant but calculated as a total number of days over the tax year.
What happens if I am made bankrupt?
If you are made bankrupt, you must let us know immediately and provide us with a copy of the bankruptcy order made by the court. Often, we will receive this directly from the court or Official Receiver but you should always let us know by contacting our Customer Service team.
Depending on what the court order says, we may suspend your IFISA and not allow you to access this or carry out any actions. You may not lose any tax benefits you have already received, but, going forward, the funds in your ISA may be owed to the Official Receiver and Trustee in Bankruptcy. Accordingly, we will need to take instructions from them as to how to manage your IFISA. This will also impact your Classic Account. Your membership of the Lending Works Platform may also need to be terminated.
We understand this may be a difficult time for you, but we must comply with all relevant insolvency legislation.
My deceased partner had a Lending Works IFISA. Can I inherit their allowance?
Upon the death of an IFISA Investor, their entitlement to tax exemptions will end. This does not mean that previous tax exemptions will be lost on funds already within the IFISA. However, any further interest or income after death will not be exempt from taxation.
Thereafter, we will close the ISA and transfer all IFISA funds to the person who has Grant of Probate in relation to the deceased ISA Investor’s estate. Your inheritance will be dependent on the deceased ISA Investor’s Will or as applied under law. You will not be able to take over the deceased investor’s IFISA or make further subscriptions to it.
How to close your Lending Works IFISA
To close your Lending Works IFISA, you can either:
- Request a transfer of your full account balance to another ISA manager (you can only do this once all funds are in your Wallet i.e. not on loan or allocated to a loan); or
- Withdraw all funds within your Lending Works ISA (again, you can only do this once all funds are in your Wallet i.e. not on loan or allocated to a loan).
Once you have completed either of the above you can contact our Customer Service team to close your account.
If you need to access funds that are on loan, you'll be glad to know that our P2P lending products are designed to be as adaptable as possible. We have two options: Flexible, where you can get fee-free access at any time, and Growth, where you benefit from a higher rates and can still access funds for a nominal fee. Take a look at our IFISA products for more information.
The cooling-off period
At Lending Works, if, in the first 14 days after you open an IFISA, you change your mind and decide you would like to cancel your account, you have a statutory right of cancellation. This is also set out in the ISA Terms and Conditions.
Any current-year subscriptions during this cancellation period will be returned to you and will not count towards your annual ISA limit. You will also need to transfer any funds subscribed in previous tax years which you transferred during this cancellation period to another ISA manager. Provided this is satisfied, you will still be able to open another Innovative Finance ISA with us or any other ISA manager, or alternatively a different type of ISA with another ISA provider. Your full annual ISA limit will remain intact.
However, if in the first 14 days any funds subscribed in the current year, or funds transferred from another ISA manager in respect of previous years’ subscriptions, are and remain allocated to a loan, or are on loan under a loan agreement, you will lose this cancellation right.
After the cancellation period, you can still close your Lending Works ISA as set out in the ISA Terms and Conditions, but you will not be able to benefit from the intact annual ISA limit for current year subscriptions.
Now that we've explained what an Innovative Finance ISA is, the next step is to open a Lending Works IFISA. If you have any questions, take a look around our help centre or get in touch.