What are the main rules of Innovative Finance ISAs, IFISAs?

Posted by Grace MatthewsJul 17, 2019

With IFISAs it’s necessary to familiarise yourself with some of the basic rules surrounding them. These are largely an extension to the ISA rules that were already in place before the introduction of the IFISA. Here are the main ones:

An IFISA allows an individual to use some, or all, of this annual ISA £20,000 investment allowance to lend funds through the peer to peer lending market and buy other debt based securities.

They are attracting rapidly growing interest from investors. As of April 5 2017, 12 months after launch, their total market value was £46m, but, a year later, this had leaped by nearly eight-fold to £366m.

So, IFISAs are worth taking a look at, as part of a balanced and diversified investment portfolio, but in order to do that, it’s necessary to familiarise yourself with some of the basic rules surrounding them. These are largely an extension to the ISA rules that were already in place before the introduction of the IFISA. Here are the main ones:

  • As we’ve seen, IFISA investors are able to lend money via the ISA without having to pay any income tax on the interest they earn.

  • While you’re free to invest via multiple peer-to-peer lending platforms, you can only contribute to one IFISA account in any tax year. 

  • And, only one IFISA account can be opened per platform, per year. However, you could, of course, open one on 5 April and a second on the following day, when the new tax year begins.

  • Every tax year the IFISA provider can be changed so you have multiple IFISAs with multiple providers. This requires opening a new IFISA each year with different providers.

  • The £20,000 annual investment limit applies to all your different types of ISA taken together, not separately. If you have more than one kind of ISA, you’ll have to decide each year, what share of your allowance will be taken by each.

  • This cap only relates to newly introduced capital. There’s no limit to the overall amount of cash that you can transfer into your IFISA from other ISAs, provided it has been accumulated within the ISA regime over previous years.

  • However, you can hold stocks or shares in an IFISA, so you can’t transfer in existing investment holdings from a Stocks & Shares ISA. First, you would have to instruct the Stocks & Shares platform provider to liquidate the holdings within that ISA before transferring the cash proceeds into the IFISA for reinvestment.

  • There’s currently no provision under HM Treasury rules for transferring existing peer to peer loans into an IFISA.

  • If you have got cash in other ISAs and would like to move them into an IFISA, you can do it easily by authorising your new ISA provider by completing an ISA transfer authority form. Your money will then be transferred directly from your old ISA provider to your new IFISA. The form should take between 15 and 30 days to process. You may be subject to transfer fees or early termination penalties.

  • It's important to distinguish between funds subscribed into another category of ISA during the current financial year and those accumulated over previous financial years, as the latter aren’t subject to the same level of restrictions in terms of transfers. For example, if you’ve subscribed £12,000 into a cash ISA during the current tax year, you are entitled to transfer this balance into an IFISA, provided you transfer the balance in full, including any interest earned on those subscriptions. In this example, your remaining ISA allowance for the year would still be £8,000. If you then wished to contribute some or all of your remaining ISA allowance to an IFISA during the same financial year, you could only do so into this same IFISA with your chosen provider. This is because your original subscription to the cash ISA will be deemed to have been made into the IFISA, and you’ll have been deemed to have subscribed the money to this IFISA all along.

  • You should never attempt to transfer funds between ISAs manually, as doing so may remove the tax-free ISA status of those funds.

  • Regular debt crowdfunding, or peer to peer lending can be included in an IFISA, but equity-based crowdfunding securities are excluded.

  • Debentures and certain other debt-based securities can now be included in an IFISA. 

  • Unlike cash ISAs, IFISAs aren’t covered by the UK’s compensation fund, known as the Financial Services Compensation Scheme, FSCS. The FSCS protects customers when authorised financial services firms fail, by covering investments of up to £85,000 in a cash ISA if the bank fails, and up to £50,000 for a Stocks & Shares ISA if the provider fails, although this does not protect you from any market fall in the value of your investments. 

  • Under new rules introduced by the Financial Conduct Authority, FCA, individuals will not be allowed to have more than 10% of their assets in peer to peer investments unless they’ve taken financial advice. This is to prevent investors from taking excessive risk. Under the new rules, platforms will be required to assess a client’s knowledge and experience of peer to peer platforms.

  • Basic-rate and higher-rate taxpayers can currently earn some interest without paying any tax, under the Personal Savings Allowance. The first £1,000 of interest earned by basic-rate taxpayers is paid tax free, while higher-rate taxpayers can earn £500 free of tax. This Personal Savings Allowance also applies to interest earned on peer-to-peer lending. For example, if you had invested in a peer-to-peer lending account offering a predicted return of 4.3%, you'd need to have invested more than £23,000 in order to use up your Personal Savings Allowance for the year, if you had no other sources of savings interest.

IFISAs can be a useful and valuable addition to an investment portfolio, so it’s worth taking some time to master these rules to see whether they could be appropriate for you.