Innovative finance ISA is the most recent addition to the ISA family introduced by the UK Government in 2016. IF-ISA allows investors to make tax-free peer to peer lending investment. It means that any interest earned through this investment will not be taxed and not count towards the investor's personal savings allowance. Unlike investment ISAs, Innovative finance individual savings accounts contain peer to peer loans. Peer to peer lending matches the investor to the borrower through an online platform, as no middle man is involved in the process so that you can earn a high-interest rate through P2P lending.
How does An IFISA works
Several types of ISAs use you in different ways. An innovative Finance ISA works by lending your money to potential borrowers. In return, you will get a set amount of interest. The interest depends on various factors such as the credit score of borrowers, risk tolerance of investors and the time for which the amount is borrowed. Investors are allowed to pay their full ISA allowance in IFISA if they want to.
Regular P2P lending Vs Innovative Finance ISA
The way in which peer to peer lending within an IFISA is usually similar to the normal P2p lending. It means that you may expect similar features, risks and rewards. However, it is best to shop around and check different providers to get the maximum return. Some ISA rules make regular P2P lending and lending through IFISA a bit different.
In non-ISA P2P lending, there is no maximum limit of the maximum amount. In contrast, your holding to other ISA products and your annual ISA allowance limit how much you can put into IFISA.
Interest earned via regular P2P lending may be d to income tax. However, interest that is earned through IFISA is never taxed.
You can transfer your IFISA funds in future tax years to other ISA products. But at the same time, the limit may not allow you to transfer your non- ISA peer to peer funds into ISA products.
If you find it difficult to choose between IFISA and regular P2P lending, we suggest you speak to a financial advisor.
Limits On An IFISA
An innovative Finance ISA is available for a UK resident who is a taxpayer and 18 years or over. The annual ISA allowance per tax year is £20,000. You can share this allowance among different types of ISAs such as cash ISA, stock and share ISAs, and lifetime ISA as well as IFISA in one tax year. But the amount should not exceed £20,000. You can open only one IFISA account each tax year. A tax year is from 6th April to 5th April. Basic rate taxpayers can earn £1,000, and higher rate taxpayers can earn £500 tax-free interest through an Innovative Finance ISA
How To Open An Innovative Finance ISA
Opening an IFISA is an easy process. You can open an account by following three simple steps:
Check your Eligibility: if you are a UK resident, a taxpayer and aged 18 years or above, you can open an IFISA. The provider usually asks for your National insurance number in order to verify your residency.
Choose A Provider: when you find that you are eligible, you need to choose a provider that offers the product and make your application. Keep in mind that you can subscribe to one IFISA account per tax year that is available through FCA regulated P2P platforms.
Start Investing: Once you successfully applied and opened an account, you can start to invest to a limit of £20,000 per tax year.
Risks Associated With An IFISA
No Doubt Innovative Finance ISA is beneficial in many terms, but some risks are associated with it. Although you can earn more interest, it is more riskier than a cash ISA. The risks are as follows:
Default Borrowers: In innovative Finance ISA, your amount is given as a loan. It means there are chances that the borrowers may default on the repayment.
No Security: Financial Services Compensation Scheme does not provide security on an IFISA. It means that your investment is at risk in case an IFISA company busts.
Contingency Fund: Many IFISA providers have a contingency fund set up to protect your money if any borrowers default. But keep in mind if multiple borrowers default simultaneously, this fund may not cover you.
Slow Cash withdrawal: If you want to withdraw money from your IFISA account, you may need to wait to get access to your money as it is a slow process.
You can reduce the risks by spreading your capital among different ISAs.
Many peer to peer lending platforms offer Innovative Finance ISA so that their customers can earn maximum. However, when it comes to choosing an IFISA, you should keep in mind some factors such as the return rate, management costs, minimum deposit and the time for which you have to tie your money. Research on different providers and then select a platform that offers a high-interest rate and low management fees.
