Invest in An Innovative Finance ISA and Receive 8.7% Returns Tax-Free
It’s approximately two months until the end of the 2016-17 tax year, which means it’s time to start considering how you should invest your annual ISA allowance before you lose the tax-efficiency come April 2017. If you are looking to diversify your portfolio, or simply generate higher yield as a one-off, tax-free investment, subscribing to an Innovative Finance ISA could be a viable solution.
With ISA plan managers like Crowd2Fund offering near 9% APR returns, it’s certainly worth investigating (more on Crowd2Fund below).
Transfer Reminder: You can transfer current tax-year ISA subscriptions and/or some or all of the previous years’ ISA subscriptions (“old ISA money”) from any ISA type to an IFISA in the tax year. (Explained below)
Basic ISA Guidelines
- £15,240 2016-17 ISA allowance (must not exceed subscription limit).
- ISA allowance increasing to £20,000 for 2017-18 tax year, starting April 6th 2017.
- Allowance can be spread between three major ISAs: Cash; Stocks & Shares; and IFISA however you wish.
- You cannot subscribe your annual ISA allowance to two ISAs of the same type in the tax year.
- If you withdraw from your ISA within the tax year you will lose the tax-efficiency on the interest earned.
What is an Innovative Finance ISA?
An Innovative Finance ISA, or IFISA, is a new ISA type that launched April 6th, 2016. It allows retail investors in peer-to-peer lending (P2P) to hold their P2P investments in a tax-efficient wrapper, sheltering the lucrative returns that can be generated from the tax man.Key Features of Peer-to-Peer Lending:
- £3bn invested in 2016.
- 177,000 active retail investors (estimate).
- Some platforms are fully FCA regulated since 2014*.
- Invest in real people and businesses, your “peers”, across a P2P platform.
- Consumer, property and business borrowers**.
- Manual or auto-diversification loan selection type**.
- Unsecured or secured loans available**.
- Average interest rate 5% per annum.
Risk Warning: Peer-to-peer lending is not covered by the FSCS, there is a risk you could lose money without recovery.
*Only FCA authorised and HMRC ISA plan manager approved providers can offer IFISAs to their customers. Currently only a handful of P2P lending platforms are fully authorised and approved to offer the IFISA.
**These are dependent on the platform and product you invest in.
One such ISA plan manager is the peer-to-peer lending platform, Crowd2Fund. Crowd2Fund has seen great success since launching in 2014, facilitating millions of pounds worth of investment in UK SME businesses from thousands of registered investors.
How do I earn 8.7% through an IFISA?
Taking Crowd2Fund as an example, you could invest your 2016-17 ISA allowance of £15,240 to the P2P platform’s Innovative Finance ISA and expect estimated return of 8.7% APR.
Crowd2Fund Investment Overview
Borrower Type: UK SME businesses
Loan Selection: Manual
Term: 6 months to 5 years, 3 years average
Gross avg Interest (%): 8.7% APR
Fees: 1% of total value of the repayment. See APR page for details.
Min. Investment: £100
The Crowd2Fund Innovative Finance ISA has been very popular since its inception, with many investors not just subscribing new money but also transferring their old ISA money. Crowd2Fund has set up a simple process to automate this for you. Transferring your old ISA money also means that it is retained within the ISA tax-wrapper.
With an investment in a Crowd2Fund Innovative Finance ISA comes some rules which require explanation.
“Cans and Cannots” of the IFISA
The same standard ISA Guidelines govern the Innovative Finance ISA, albeit there has been some adaptation to accommodate the new asset class of peer-to-peer lending.
- Subscribe some or all of your £15,240 tax-year allowance to an IFISA.
- Transfer current tax-year ISA subscriptions from any ISA type to an IFISA.
- Transfer old ISA subscriptions from any ISA type to an IFISA.
- Subscribe annual ISA allowance to two IFISAs in the same tax year.
- Subscribe more than £15,240 across your Stocks and Shares, Cash and IFISA.
- Ask the P2P lending platform, like Crowd2Fund, for investment advice.*
*This is understood to be the case with peer-to-peer lending platforms which are approved as ISA plan managers.
Transfers & Withdrawals Explained
As mentioned above, the guidelines which hold ISA plan managers offering Innovative Finance ISAs to account have some added complexity, primarily surrounding transfers and withdrawals.
ISA rules are not that strict when it comes to transferring in and out of ISAs, however the ISA plan manager does hold some discretion when it comes to this, so be sure to speak to your plan manager when making these decisions.It can take a few weeks to make the transfer into an IFISA.
Here are a couple of scenarios.
You want to transfer all of your current tax-year Cash ISA subscriptions of £15,240 (total annual allowance 2016-17) to the Crowd2Fund Innovative Finance ISA - this is fine.
You want to transfer your old Stocks and Shares ISA subscriptions, totalling £20,000, to the Crowd2Fund IFISA – this is also fine.
You’ve already subscribed some of your annual tax-year allowance to an existing Innovative Finance ISA, but you don’t want to transfer out of it, preferring to subscribe some more 2016-17 ISA allowance to a new Crowd2Fund IFISA - this is not fine.
You would need to speak to your current IFISA provider/plan manager so they can arrange a “sell-out” of the loans you are storing in said IFISA, before transferring the cash subscriptions into a Crowd2Fund IFISA.
Peer-to-peer lending is not what is considered to be a “liquid” asset class. It is not like cash or equities which are easily tradable and therefore liquid. If you wanted to withdraw from your Innovative Finance ISA, you would need to get in touch with the peer-to-peer lending platform (potentially your ISA plan manager) facilitating your investment and request they sell your loan parts to a new investor.
Crowd2Fund allows you to manage this yourself on its Exchange. You simply offer the loan to the community and another investor purchases it from you. This converts your P2P loan into a cash asset, which can then be withdrawn. There are, however, no guarantees that your loan will sell as quickly as you’d potentially hope.
Reminder: your capital is at risk, actual returns may be higher or lower, tax treatment dependent on individual circumstance and is subject to change.
It’s good timing to be considering your 2016-17 ISA allowance, with a couple of months remaining until the end of the tax year. Subscribing some or all of your £15,240 allowance to an Innovative Finance ISA could be a viable option to gain yield in the region 8% plus in cases. You could also consider transferring unlimited “old ISA money” from a different ISA type and reap the returns of a P2P investment, tax-free.You need to ensure you’re comfortable investing in peer-to-peer lending and via an IFISA before you do invest, however.