Last week, the HMRC announced an exciting update on the hotly anticipated Innovative Finance ISA (IFISA). As of April 6th, investors will have the opportunity to invest in peer-to-peer lending (P2P), earning some of the more attractive, risk-adjusted returns available available on the market. Moreover, these returns will be free from tax.
Be conscious, however, P2P lending is an alternative investment and not a savings product. You will not be covered by the FSCS if your money is lost. It is up to you whether you deem this an appropriate product for increasing your savings or not.
So, what exactly is the Innovative Finance ISA? You can find out more here regards the mechanics of the “peer-to-peer ISA” (as some call it): ‘Innovative Finance ISA 2016: Overview’. For now, however, here are the headlines:
- IFISA arrives 6th April, 2016
- £15,240 ISA allowance; split between three main adult ISA types however you deem appropriate
- Peer-to-peer lending platforms can act as ISA Plan Managers without legally owning or co-owning the loans
- ISA transfers and withdrawals adapted to fit illiquid nature of P2P lending
- Investors can store multiple peer-to-peer investments in one singular IFISA (more below)
Peer-to-Peer Platforms Offering the IFISA
(Statistics correct at time of publishing)
Crowdstacker IF ISA
This SME focused peer-to-peer platform allows you to manually select British businesses to invest in. They are one of few platforms authorised and regulated with HMRC permissions allowing them to offer the Innovative Finance ISA.
Here are the loans you can invest in with Crowdstacker:
Target raise: £10million
Raised to-date: £5,437,117 (since Q4 2015)
Interest rate: 6.39% per annum
Term: 12, 18 or 36 months
Security: £45m assets
Min investment: £1,000
Target raise: £3million
Raised to-date: £3,163,095
Interest rate: 6.8% per annum
Term: 3 years
Security: residential property
Min investment: £700
Crowd2Fund IF ISA
With Crowd2Fund, similar to Crowdstacker, you manually select British businesses to invest in where a personal guarantee is taken to secure the loan.
Interest rate: 8.7% per annum (average)
Min investment: £250
Multiple P2P Products in One IF ISA
In an earlier article published on Orca, we told you that you could only open an IF ISA with a single peer-to-peer provider and investing across its platform. In practice, you wouldn’t be able to open an IF ISA with Crowdstacker and the invest in a Zopa product.
There has been a big announcement since then. You can now open an Innovative Finance ISA with a 3rd party ISA provider and store multiple peer-to-peer products in it, earning tax-free interest on a diversified portfolio of P2P investments.
It is no surprise that peer-to-peer lending has grown into a multi-billion-pound industry in its short life, with high interest rates on offer, a social dynamic to the lending and a transparency not afforded by banks and traditional investments. Well, the UK government has now made it even easier for savers and investors to reap the benefits of this high yield investment by providing an added incentive of a tax-free wrapper.
What to Be Aware of
- You can only subscribe your tax year ISA allowance to one Innovative Finance ISA per tax year
If you open an IF ISA with Zopa this tax year (April 2016 and only if they have the appropriate authorisaton) you cannot subscribe any more of your annual allowance to another IF ISA, until the following tax year. You can transfer old ISA money into any number of IF ISAs in a single year, however.
- P2P platforms offering IF ISAs will not allow investors to store other platform’s products in their ISA
As you’d likely presume, if you open an IF ISA with Zopa there will be some resistance to you including your RateSetter loans within their tax-efficient wrapper. You would have to liquidate your Zopa loans, transforming the asset into cash which is when you can instruct a transfer to RateSetter and invest.
NB: The aforementioned P2P platforms operate under interim permissions and so can’t offer IF ISAs until they have full FCA authorisation and HMRC ISA status.
- Your ISA allowance applies to all ISAs collectively
If you invest some allowance into a stocks & shares ISA, say £5,000, you will only have £10,240 to play with for the remainder of the tax year, even if you withdraw the £5k from your S&S ISA it will still be deducted from your allowance for the tax year.
- Withdrawals procedure different to traditional ISAs
With P2P lending, you should be prepared to commit to the duration of the loan term. However, if you did want to withdraw from your IF ISA, but you have capital locked into loans, you will need to liquidate the asset/loans in order to gain early access and withdraw cash. To gain early access, you are required to sell your loan parts on a “secondary market” which, in the case of P2P lending, is not a guarantee due to the relative illiquidity of the asset class. UK platforms like Zopa, RateSetter and Funding Circle tend to have a consistent volume of investors coming to their platforms, so easy access and selling out of loans shouldn’t be much of a problem.
This means that if you want to withdraw from your IF ISA you will need to sell-out of your loan with the respective platform that you have an investment product with, turning your investment into cash so it can be withdrawn from your IF ISA.
To see which platforms currently offer the Innovative Finance ISA visit our IF ISA Tracker page by clicking the linked title above.
The launch of the IF ISA on April 6th may not be the overwhelming event initially anticipated – it’s unlikely that the major P2P lending platforms will have IF ISAs on the market, despite their advertising campaigns. Furthermore, the division seen in the wealth management sector regarding how P2P lending is perceived will not be automatically suppressed with the advent of the IF ISA. For example, Hargreaves Lansdown has announced that it will launch a peer-to-pee proposition later this year, but not an ‘umbrella-style product for lots of different providers’ and the fact that only Zopa and RateSetter are actively marketing their ISA offerings suggests the FCA has its work cut out getting remaining UK peer-to-peer platforms ISA permissions in the coming month(s).
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