P2P Beginners: What Is an Innovative Finance ISA?
What is an Innovative Finance ISA?
The Innovative Finance ISA (IF ISA) is an Individual Savings Account (ISA), like a cash ISA or stocks and shares ISA, but for peer to peer lending (P2P). It was launched April 2016 and allows you to hold your peer to peer investments in an ISA “wrapper”, earning returns without having to pay tax on them.
Since April 2016, over 25 P2P platforms have launched their respective IF ISAs onto the market. To offer an IF ISA, a P2P platform must be fully FCA authorised and approved as an ISA plan manager by the HMRC.
How does it work?
Before opening an IF ISA with a given P2P platform, you first need to apply for one (you apply for an IF ISA when signing up with the P2P platform) – the application requires your National Insurance number and typically takes a few minutes before you’re approved. Once approved, you can invest in the P2P loans offered by the platform, via the IF ISA.
What are the rules?
Definition help: The term “subscriptions” basically refers to money held in an ISA. You “subscribe” money (or subscriptions) to an ISA.
IF ISA criteria and rules:
- UK taxpayers aged 18 or over are eligible to open an IF ISA
- Annual tax year ISA allowance of £20,000 applies (for tax year 2018-19)
- Only one IF ISA per tax year can be subscribed to with current tax year subscriptions
- Old cash and stocks & shares ISA subscriptions can be transferred to multiple IF ISAs*
- Annual tax year allowance (£20,000) can be divided between different ISA types (cash, stocks & shares, IF ISA) at your discretion
- Existing loans at a P2P platform cannot usually be transferred into an IF ISA, they must be sold before the cash can be reinvested in loans via an IF ISA
- To access funds out on loan early (before the end of the loan term), you must sell your loans to another investor at the P2P platform
*To transfer current tax year subscriptions from an IF ISA, you must transfer the full value of subscriptions.
*To transfer old ISA subscriptions from a previous tax year, for example from an old cash ISA, you can transfer the full or partial value of subscriptions.
We polled our users (P2P investors) to get their view on the attractiveness of the Innovative Finance ISA compared with the cash ISA. Here are the results:
Warning: Peer to peer lending is not covered by the Financial Services Compensation Scheme, therefore your money is at risk from loss without recovery. This is in comparison with a bank – who you may hold a cash ISA with – where your money is protected.
If you’re brand new to P2P lending, it is strongly recommended that you get familiar with the risks before choosing to open an IF ISA. Remember, a cash ISA is safer than an IF ISA.