An innovative finance ISA, or ‘IFISA’, is just one of the many types of ISAs available. But how does it work, and who might benefit from opening one? Here’s everything you should know.

Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future. 

What is an innovative finance ISA?

An innovative finance ISA allows you to lend money to a variety of borrowers who then repay your loan with interest. In other words, it’s a way to get involved in peer-to-peer (P2P) lending. You can also use an IFISA to help crowdfund a business venture.

• You give the money directly to borrowers (e.g. property developers, businesses).
• The interest on the loan repayments is how you make money on your investment.
• You don’t pay any tax on the interest you are paid.
• Rather than holding stocks or cash in your ISA, you hold P2P loans.

The interest rate you get depends on how long you’re prepared to leave your money ‘untouched’ for. So, the longer you leave your money alone, the better interest rates you might get.

How does the innovative finance ISA allowance work?

The ISA allowance is how much you’re allowed to save, tax-free, into an ISA in a single tax period.

You can save up to £20,000 in ISAs during the 2021-2022 tax year. You can’t put in more than this, but you can divide your allowance across different ISAs.

So, you can invest up to £20,000 per tax year into your IFISA.

How do I open an IFISA?

It’s pretty easy to open an innovative finance ISA.

• Check your eligibility: if you’re over 18 and a UK taxpayer, you could be eligible to open an IFISA.
• Apply to an IFISA provider: shop around for IFISAs and apply to the one that fits your needs.
• Start investing: if your application is successful, you can start investing right away.

Can I hold an IFISA alongside other ISAs?

Yes, you can. However, some rules apply.

• You can only pay into one IFISA per tax year. So, if you hold two IFISAs, you can’t pay into both during a single tax period.
• You can hold an IFISA alongside other ISAs, like a cash ISA. However, just remember you can’t exceed your £20,000 allowance.

Are there any risks associated with having an IFISA?

Yes. Remember, it’s a type of investment, and investments always carry some degree of risk. So, if you’re thinking about starting an IFISA, here are some risks to bear in mind.

• The Financial Services Compensation Scheme (FSCS) protects cash savings of up to £80,000 per provider. In other words, you won’t lose this money if your provider collapses. There’s no such protection available on IFISAs or P2P loans.
• There’s always the risk that a debtor will default on their loan repayments.
• If you want to withdraw money from your ISA, it can be a slow process.

Essentially, there’s a chance you’ll get back less than you invested.

Is an innovative finance ISA right for me?

Well, it depends on your financial goals and how risk-averse you are.

For example, if you’re just trying to save money, you might decide a cash ISA would work better. However, if you’re an investor looking to diversify your portfolio, and you can handle a little risk, you might find it’s worth opening an IFISA.

It’s always best to get financial advice before opening an ISA to make sure you choose the right one for your needs.

Takeaway

An IFISA is a great opportunity to lend capital to private borrowers and crowdfund projects. That said, never forget there’s some risk attached to IFISAs, and they’re not right for everyone.

Don’t jump into opening an IFISA without thinking through the pros and cons, and never invest more money than you can afford to lose.

To see other ISA investment account options, check out our featured stocks and shares ISAs in the UK.

The post What is an innovative finance ISA, or IFISA? appeared first on The Twelfth Magpie.

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