IF ISA Countdown: 2016-17 ISA Guidelines to Investing in an Innovative Finance ISA
The end of the tax-year 2016-17 is looming; 70 days to be exact. UK savers have had a tough past year with savings rates being negatively impacted as a result of Brexit – Bank of England base rate dropped 25 baiss points to 0.25%. To compound the misery, cash ISAs are struggling to yield much above 1%. An alternative investment does exist, providing attractive risk-adjusted returns.The Innovative Finance ISA (IFISA) was launched in April 2016, allowing investors in peer-to-peer lending (P2P) to hold their P2P investments in a tax-efficient wrapper. This lucrative ISA product was hotly tipped to drive the alternative investment class into the mainstream - 400,000 new investors predicted by Nesta in its 2015 Alternative Finance report. However, due to a regulatory backlog in authorising peer-to-peer lenders, only a couple of platforms currently offer IFISAs (see below).The good news is, platforms are becoming fully FCA authorised and HMRC approved as ISA plan managers, meaning more IF ISAs should be entering the market, yielding rates in the region 5% or more annually.
Here is a graph displaying the returns available from 10 of the top Fixed Rate ISAs* on the market currently, compared with three Innovative Finance ISA providers.
*10 Fixed Rate ISA providers taken from ‘Top ISA Rates’ on 25/01/17: https://top-isa-rates.co.uk/*Peer-to-peer lending is not covered by the FSCS. Investor’s capital is at risk and could be be lost without recovery.
ISA guidelines are issued to ISA plan managers each year by the governing body, HMRC - the rules and instructions for ISA managers from April 2016 can be found by clicking the link below. Due to peer-to-peer lending being a relatively new asset class, the rules surrounding the Innovative Finance ISA have been adapted to fit, but standard rules still apply.Read more: Guidance Notes for ISA Managers
The annual ISA allowance for 2016-17 is £15,240. It was the same the year before, but has been gradually increasing for some time.
ISA subscription rules
- £15,240 for 2015-16 (two months remaining) rising to £20,000 for tax year 2016-17
- Subscription allowance cannot be exceeded in the tax-year
- Allowance can be spread between ISAs however the investor wishes:£10,000 to IFISA, £3,000 to Stocks & Shares and £2,240 to Cash ISA for example.
- An investor cannot subscribe to another ISA of the same type in that tax year:transfer rules allow ISA plan managers who offer the IFISA to make their own decision when it comes to an investor holding multiple IFISAs in a single tax year (explained in 'Adapted IFISA rules').
‘From 6 April 2016 subscriptions can be transferred freely between cash, stock and shares, and innovative finance ISAs.’ – as stated in Guidance Notes for ISA Managers.Under ISA rules, an investor can transfer:
- all of the current year’s ISA subscriptions, the investments bought with those subscriptions, and any income arising on those investments (current year account),
- some or all of the previous years’ ISA subscriptions, the investments bought with those subscriptions, and any income arising on those investments (prior years account).
Adapted IFISA rules
Because P2P lending is not a liquid asset class, an investor’s investment must be sold to a new investor on the platform, thus turning the asset into cash so that it can then be transferred.
An investor could subscribe their tax-year ISA allowance to an Innovative Finance ISA with one ISA plan manager (P2P platform or other provider) and then open another IF ISA in the same tax year with a different plan manager and transfer old ISA money into it, therefore holding two IF ISAs in the tax year*
*Having consulted with the HMRC it is clear that this is a decision made between the investor and the plan manager.
IF ISA Providers
To-date, only a couple of peer-to-peer lending platforms offer Innovative Finance ISAs. There are three stages involved in becoming an IFISA provider:
- Full FCA authorisation
- HMRC approval as an ISA manager
- IF ISA launched
*Statistics correct at time of publication - rates in per annum.
IFISA launched (click name to visit platform's website)
HMRC ISA approved
Full FCA authorisation
- Capital Stackers: 5% to 20% (loan dependent)
*The above P2P platforms are included in the list as Orca has been made aware of their status, other platforms may have legitimacy to be included.
Want to keep informed about platforms offering the Innovative Finance ISA? Visit our IFISA Tracker page
At present, many of the big platform, such as Zopa, Funding Circle, RateSetter and LendInvest, operate under interim permissions and must become fully authorised by the FCA before applying to the HMRC for ISA plan manager status. Exactly when the major platforms will pass these regulatory barriers is still unknown, but it is expected that several more prominent P2P platforms will have Innovative Finance ISAs available on the market in the coming months. Landbay, for example, is expected to launch its IF ISA before the end of this tax year (2016-17).
Innovative Finance ISAs have proven extremely popular for those peer-to-peer lenders who can offer them. The race to become regulated and approved is still very much on for most platforms, but with a couple of IF ISAs live on the market, retail investors can start earning risk-adjusted yield before the 2016-17 tax year ends in April