Innovative Finance ISA Rules: What You Need to Know
The Innovative Finance ISA (IFISA) continues to grow in popularity. Also known as a peer to peer lending ISA, it was introduced in 2016, and offers much higher returns than your standard cash ISA, and potentially less volatility than stocks and shares ISAs. IFISAs are based on the premise of investing in peer to peer (P2P) loans and there are several different platforms that offer them. As a result, interest rates, fees and levels of security can vary significantly from one IFISA to another. However, there are a few basic rules that all IFISAs must abide by and are good to get to grips with before handing over your money.
Let’s take a look at the most important rules for IFISAs.
Which providers are able to offer IFISAs?
At the moment, the type of P2P ‘crowdfunding’ that is eligible for IFISAs is restricted to debt-based crowdfunding, but there have been discussions around including equity-based crowdfunding activities in the future.
Are IFISAs protected under the Financial Services Compensation Scheme (FSCS)?
The same rule applies that your capital is at risk when investing in an IFISA, as it is with any other investment. However, unlike cash ISAs, IFISAs aren’t covered by the UK’s compensation fund, known as the Financial Services Compensation Scheme (FSCS). The FSCS protects customers when authorised financial services firms fail by covering investments of up to £85,000 in a cash ISA if the bank fails, and up to £50,000 for a stock and shares ISA if the provider fails (note that this does not protect you from the risk that your stocks and shares fall in value).
When it comes to P2P investing, your provider should assure you that there are other measures in place to secure your investment. For example, at The House Crowd, all our investments are protected via a legal charge against borrowers’ property, so that we can force a sale of the asset if the borrower defaults in order to regain investor capital.
We also set a conservative loan-to-value on all loans to protect against property market fluctuations, as well as conduct thorough credit checking and due diligence to assess potential borrowers.
However, property values can fall in value so neither of these measures should be taken to mean that any form of ‘guarantee’ is in place.
What is the tax-free investment allowance?
Simply put: just like other ISAs, IFISAs allow for tax-free interest savings on up to £20,000 in any given tax year. However, you can only invest in one IFISA during this time.
Can you transfer existing P2P loans into an IFISA?
There currently isn’t a system by which to transfer existing P2P loans into an IFISA, due to rules imposed by HM Treasury. However, if you have money tied up in a P2P loan from a platform that allows you to sell your loan to other investors, you could do that and reinvest your money into an IFISA.
Can you transfer from one type of ISA (e.g. a cash ISA) into an IFISA?
If you’ve accumulated money in other ISAs and would like to move them into an IFISA, the good news is that you can do it quite easily.
All you need to do is authorise your new ISA provider by completing an ISA transfer authority form. Your money will then be transferred directly from your old ISA provider to your new IFISA. The form should take between 15 and 30 days to process. Just remember to check with your existing ISA provider about potential transfer fees or early termination penalties.
The House Crowd’s IFISA
You can invest in our IFISA from as little as £1,000 and earn tax-free interest of up to 7% per annum. We automatically diversify investments across a portfolio of secured peer to peer lending and property development opportunities, making your money work hard for you.
Capital at risk and rates not guaranteed. Withdrawals may be restricted due to illiquidity. Investments are not covered by the Financial Services Compensation Scheme (FSCS). Please read our full risk warning.