Innovative Finance ISAs are a kind of Individual Savings Account offered by certain Peer to Peer Lending platforms that offer a tax-efficient wrapper for investments in Peer to Peer Lending (P2P).
Innovative Finance ISAs grant a way for investors in Peer to Peer to earn tax free interest on their investments. IFISAs are offered by a selection of Peer to Peer Lending Platforms.
As an Innovative Finance ISA is its own distinct kind of Individual Savings Account you are also permitted to open a separate investment and/or cash ISA with the same tax year, however savers who do so will need to break up their annual allowance between the three account types if they do so.
The Innovative Finance ISA is a new type of ISA that is a half way house between a cash ISA and a stocks & shares ISA. IFISAs basically allow you to become a lender through utilising an online platform which connects you to willing borrowers. The interest that you earn through peer-to-peer (P2P) lending is not subject to any tax.
Typical rates of return range from over 2% for short-term loans to over 8% for loans that last 5 years or more.
As with cash and stocks and shares ISAs you are permitted to only open one such ISA per year.
Peer to peer lending platforms allow investors to directly lend money to people and businesses that are looking for a loan, as there is not a middle man such as a bank or building society it may offer better rates.
Although peer-to-peer lending platforms normally have a way of assessing the credit worthiness of their borrowers and may encourage you to spread investments, as borrowers can default on their loans, peer to peer lending is a capital at risk investment, meaning investors could lose some or all of the money invested.
P2P platforms are now obligated to have a provision funds to reimburse lenders in the result of financial loss. FCA regulation requires P2P fund provision to be at least £50,000 by April 2017 but most high profile lenders have much larger funds in excess of millions of pounds. This means that your original capital investment should be protected and you should also receive interest even if the borrower (s) were to cease repayment (s).
Some providers may have a provision fund to cover you in this event; however money invested in an IFISA is still not covered by the Financial Service Compensation Scheme (FSCS) which is a designed to protect savers in certain account types should their provider go out of business.
The suitability of any savings or investment product really depends on your circumstances and attitude to risk. If you are unsure you should seek independent financial advice.
There are a selection of IFISAs available from different providers, so it is worth shopping around to find the option that you feel meets your requirements. With the launch of innovative finance ISAs in April 2016 the roll out of new products has been slow as the regulator The Financial Conduct Authority has been taking time to approve new providers in this relatively new investment market.
This website contains information only and does not constitute advice or a personal recommendation in any way whatsoever. The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. The tax efficiency of ISAs is based on current tax law and there is no guarantee that tax rules will stay the same in the future.
Different types of investment carry different levels of risk and may not be suitable for all investors. Please ensure that you read the Important Risk Information for further details. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment and should read the product literature. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
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15th March 2021
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