Home Finance Innovative Finance ISA Rules: Make more out of your money

Innovative Finance ISA Rules: Make more out of your money

by Altaf Shaikh
Innovative Finance ISA Rules: Make more out of your money

In This Article, We Are Going To Discuss Innovative Finance ISA Rules: Make more out of your money

On April 2016, the UK government introduced Innovative Finance ISA as a new type of ISA (Individual Savings Account). The IFISA is a part of the ISA family including cash ISA, Junior ISA, stocks & shares ISA and Lifetime ISA.

The new type of ISA offers the same tax-free wrapper as the others. This means that you can invest up to £20,000 of you Annual savings allowance per tax year and enjoy returns without having to pay tax on interest. 

 An Innovative Finance ISA allows individuals to invest through peer-to-peer lending platforms using their annual ISA allowance. This has attracted investors’ attention and has become popular among them.

The proof of this is that just 12 months after its launch, the market value of IFISA was £46m. And then another year late this grew into eight-fold to almost £366m. In 2019, the Innovative Finance ISA market exceeded the investment mark of £1 billion.

 Therefore, it is clear that the IFISAs are worth the investment to create a diversified and balanced investment portfolio. However, before you make the decision, you need to understand the basic rules for IFISAs completely.

Rules for this type of investment are more like an extension to the rules for ISA that were set up before the introduction of Innovative Finance ISA. But, you still need to understand the additions and alterations in these rules.

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Innovative Finance ISA Rules

The Innovative Finance ISA Rules Are Given Below

 

  • You are free to invest through different peer to peer platforms, but you can only invest in one account every tax year, and you can only open one IFISA account per platform each tax year. 
  • The annual ISA allowance for 2020/21 tax year is £20,000. These funds apply to you ISAs of all types taken together, not separately. Hence, if you have invested in more than one type of ISA account, you will need to decide every year what part of your allowance you will allocate to each type.  
  • Investors can lend money through the ISA into IFISA without paying any income tax on the returns they earn. 
  • There is no cap on the overall amount of money that you can transfer in your IFISA account from other types of ISA, given that it has been accumulated within the ISA over past tax years. 
  • If you have money in other types of ISA and want to transfer it into an Innovative Finance ISA, then you can do it by authorising a new ISA provider. You will just need to complete an ISA transfer authority form. Your funds will be transferred to from your previous ISA Company to the new IFISA provider directly. Usually, the process takes between 15 to 30 days. You might have to pay a transfer fee or an early termination fee depending on your provider. 
  • Currently, there is no provision under HM treasury rules for transferring existing peer to peer loans into an Innovative Finance ISA.
  • You aren’t allowed to hold your stocks & shares in an IFISA, so you cannot transfer any existing investments from stocks & shares ISA to IFISA. You will need to ask the stocks & share ISA provider to liquidate your holdings within the ISA before you can transfer the proceeds into your IFISA for reinvestment. 
  • You shouldn’t try to transfer money between the ISA types manually. If you do try, you will be risking losing the tax-free status of ISA funds. 
  • Investors cannot have more than 10 per cent of their assets in peer to peer lending unless they have taken professional financial advice. This is to prevent the investors from taking more risk than they can manage, and according to FCA impose rules, the p2p platforms have to assess an investor’s knowledge and experience in p2p before allowing them to invest.
  • It is essential to differentiate between the funds invested into another type of ISA during the current tax year and funds accumulated in past years since the latter is not subject to the same level to restriction in terms of transfer. For instance, if you have invested up to £12,000 into cash ISA during the current tax year, then you can transfer this money into an IFISA, given you transfer the complete balance including all interest earned on those investments. In the above example, the remaining amount of your allowance would be around £8,000. Then if you wanted to invest some or the entire remaining fund to an IFISA during the same tax year, you could do so only into the same IFISA with your chosen provider. This is because your original investment in cash ISA will be deemed to have been made into the IFISA and you will have to subscribe your funds into this IFISA. 
  • The regular peer to peer lending can be included in an Innovative Finance ISA. 
  • Now debentures and some other debt-based securities like fixed-term property bonds can be included in an IFISA. 
  • Unlike the cash ISA, Innovative Finance ISA is not covered by the Financial Services Compensation Scheme (FSCS). The FSCS protects investors when authorised financial firms fail. They cover investments of up to £85,000 in a Cash ISA and up to £50,000 for a Stocks & Shares ISA. It is important to remember that FSCS only protects you if the provider fails, you won’t be protected if there is a market fall in the value of your investments. 
  • The Financial Conduct Authority (FCA) introduced rules on January 2010 regarding the promotion of mini-bonds state which only experienced investors are eligible to invest in. The FCA describes mini-bonds as ‘where a business raises funds from investors with the intention of lending loans to a third party or investing in other businesses or properties’. 

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Conclusion

The Innovative Finance ISA can be a valuable addition to your investment portfolio, so it is with taking some time to learn these rules to know whether this investment is right for you or not. 

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