Now well into the 2019/20 tax year, investors are starting to look towards their plans for the coming months - in particular, where their annual £20,000 tax free ISA allowance will be allocated.
Whilst the IFISA market is still relatively new, the most recent HMRC data reported that more than £290m was invested in 31,000 IFISA accounts during the 2017/18 tax year (a year-on-year increase of more than 700 per cent).
What is an IFISA?
The Innovative Finance ISA (IFISA) was introduced by the Government in 2016, with the focus on allowing individuals to use some or all of their annual ISA investment allowance to lend funds through the Peer-to-Peer (P2P) lending market and other debt-based securities, while receiving tax free interest and capital gains.
As part of the Individual Savings Accounts (ISAs) family, ISAs are a way of making investments without paying tax on the returns your investments make.
Following new rules introduced by the FCA from January 1st 2020 regarding the promotion of speculative mini-bonds, only experienced investors classified as either sophisticated or high-net-worth are eligible to invest into mini-bonds, which the FCA describe as ‘where a company raises money from investors with the intention of lending the money to a third party or investing in other companies, or property.’
Currently, the maximum you can save in an ISA in a year is £20,000, therefore many investors are looking to ways in which they can make their investments go further with a healthy balance of risk and returns.
What are the tax benefits of an IFISA?
Before the introduction of the IFISA in 2016, many investors were beginning to take advantage of the growing peer to peer lending market but couldn’t do so through an ISA. In addition to this, investors were also required to declare their income from peer to peer investments to the taxman. This was typically via a self–assessment return with the gains being taxable at the individual’s margin rates.
With the growing popularity of peer to peer lending and debt-based securities, the government introduced the IFISA on April 6 2016. The IFISA allows individuals to use some, or all, of their annual ISA investment allowance to lend funds through the peer to peer lending market, while receiving the usual ISA benefits of tax-free interest and capital gains. So, by using an IFISA, peer to peer lending income can be taken out of tax completely.
How to choose the right IFISA provider for you?
IFISAs are relatively new but there is already a wide variety of types of providers. The main funded IFISAs include business; green energy; infrastructure; property development; crowdfunding small businesses; and buy-to-let mortgages. The projected rates of return range from 3% a year to 15% and vary in terms of their risk.
Though investing into mini-bonds through an IFISA is now restricted, everyday (restricted) investors may still be eligible to invest into other types of IFISA - such as SME lending, consumer lending and green energy - though the FCA states that everyday investors new to the P2P sector must not invest more than 10% of their investable assets. If you’re unsure about your investor classification and whether you’re eligible to invest, you should speak to an independent financial advisor and check with individual platforms about their eligibility criteria.
All IFISA providers will have their minimum investment allowance, however, it’s vital to take into consideration not only what is affordable but that investments are also spread out equally to provide a balanced and diverse portfolio. It is vital with an IFISA, or any form of investment, that thorough research is undertaken and where possible an independent financial advisor is commissioned to support and guide you through the choices made into selected investments.
Take time to research a provider. Does it have an online platform where you can view the progress of individual investments? Has it been established long and has anything been written about it in the financial media? Does it have a track record in managing the kind of investment you are considering?
Selecting the right IFISA provider once you have thoroughly researched all of your available options will also depend on your risk appetite.
Finally, the type of sector where the investments are made could influence the likely returns or risk. For example in the case of Maven Bonds, investments made into their property bonds via an IFISA are asset-backed and are generally secured by a first ranking charge.
MAVEN Bonds investment platform offers experienced investors the opportunity to access tax free returns of up to 7.75% per annum by investing through the MAVEN Bonds Innovative Finance ISA.
These bonds can be issued to fund a portfolio of identified projects, or they can be issued by a company to raise the funds to loan out to a group of developments over time.
In whatever way the funds raised are deployed, with a property bond, you are essentially investing in part of property development or developments.
More information about MAVEN Bonds can be found at www.mavenbonds.co.uk.
The MAVEN Bonds product is aimed at experienced investors who are classified as either sophisticated investors or high-net-worth individuals and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).
Originally published 19th September 2019, updated 16th December 2019.