What is the Innovative Finance ISA?

The Innovative Finance ISA was introduced in April 2016 by the UK government to allow investors to benefit from capital gains and income tax relief. This addition to the ISA family, which also includes Cash ISAs and Stocks & Shares ISAs, was welcomed by the online lending community as it indicated government approval of the peer-to-peer (P2P) lending model.

Why was it introduced?

The IF ISA was introduced by the government as part of an initiative providing savers greater diversity and flexibility when selecting ISA product offerings. The government is also keen to encourage growth in the P2P lending sector – partly to introduce much needed competition into the banking market.

Annual Allowance Limits

Currently, the limit is £15,240 for the tax year running from April 2016 to April 2017. However, the Chancellor announced this will be raised to £20,000 from April 2017, making the IF ISA even more attractive and a huge boost for retail investors.

How does the IF ISA differ from Cash ISAs?

The Innovative Finance ISA offers savers a higher rate of interest than traditional Cash ISAs. However, investors must bear the risks associated with lending capital. You can learn more about the risks involved in peer-to-peer investing here.

It is also worth noting that, unlike Cash ISAs, peer-to-peer lending platforms are not covered by the Financial Services Compensation Scheme (FSCS). The FSCS is a UK compensation scheme offered to customers in the event of certain authorised financial services firms (such as a bank, building society or credit union) falling into default. The maximum level of compensation offered to deposit holders is currently £75,000.

ISA Transfers

Another government initiative aimed at making the ISA offering more flexible for investors, the ISA transfer means investors can now:

  • Divide your ISA allowance between a cash ISA, stocks and shares ISA and an Innovative Finance ISA – a single ISA allowance was introduced in July 2014 for this purpose.
  • Transfer funds held with one ISA provider to another (as long as your current provider accepts transfers).
  • Transfer savings accumulated via other ISA categories from previous years to an IF ISA. The government has outlined further details with respect to transfer deadlines. ISA transfers should take no longer than 15 working days for cash ISAs and 30 days working days for stocks and shares ISAs respectively. Due to the relatively illiquid nature of P2P investments the government has revoked transfer deadlines for the IF ISA and transfers can only be made once investments have been liquidated to cash.

What investments are included in IF ISA?

The IF ISA makes it possible for interest and gains on P2P loans to be tax-advantaged within this wrapper. The scope of the IF ISA does not currently extend to equity-based crowdfunding.

What are the IF ISA eligibility criteria?

The IF ISA will be made available to UK residents aged 18 years and over. This particular ISA category will not be available for Junior ISAs.

Warning: Tax laws are subject to change and individuals’ tax status varies. Seek independent advice if necessary.