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IFISA Investment Guide

Just what is the Innovative Finance ISA (IFISA)? And what can it do for me?


A businessagent.com guide to IFISA

 

What is an IFISA?

The Innovative Finance ISA, or IFISA, is a tax wrapper for UK investors who want to lend money using Financial Conduct Authority (FCA) regulated peer-2-peer lending platforms.

 

What does an IFISA do for me?

If you are looking to lend money using a peer-2peer lending platform then an IFISA allows you to receive interest and capital gains on your investment (the money that you have lent) tax free. As a higher rate tax payer that means that for every £1 income or gain in value that you receive from your investment/lending you save yourself 40p in tax – just by investing via the IFISA tax wrapper. As a lower rate tax payer you have saved yourself 20p in tax.

Here is an example of how the tax on income from investment works. If you invested £10,000 in a portfolio of peer-2-peer loans that yielded 10% interest the annual interest would be £1,000. This is added to your total taxable income and taxed accordingly. So, if you add that £1,000 of income to your total annual income and you remain a lower rate tax payer then you face a £200 tax bill. As a higher rate tax payer you would face a £400 tax bill and as an additional rate tax payer a £450 tax bill. BUT if you lent money within the IFISA tax wrapper there would be no tax bill to pay.   

 

 

£10,000 investment with 10% annual yield in a portfolio of peer2peer loans

Within an IFISA: £10,000 investment with 10% annual yield in a portfolio of peer2peer loans

Tax Rate

Income

Tax Payable

Income you take away

Income

Tax Payable

Income you take away

20%

£1,000

£200

£800

£1,000

£0

£1,000

40%

£1,000

£400

£600

£1,000

£0

£1,000

45%

£1,000

£450

£550

£1,000

£0

£1,000



What doesn’t an IFISA do for me?

Just like an ISA an IFISA is not a guarantee. It doesn’t change the risks of lending money through a peer-2-peer platform and it doesn’t offer you access to a compensation scheme. Which means you can lose some or all of the money that you lend/invest both within and without an IFISA.

 

How much can I lend/invest through an IFISA?

The annual ISA limit for the 2017/2018 tax year is £20,000. Which means you can lend up to £20,000 on a peer-2-peer platform tax free in an IFISA but any further investment that you may wish to make would not be tax free.

 

I’m not really sure what Peer-2-Peer is…

Peer-2-Peer (P2P) lending is a form of investing where people with money who are looking for an income (interest) lend to credit checked individuals and businesses that are looking to borrow. They do so collectively through the Peer-2-Peer lending platforms, which amalgamate the money of those willing to lend.

The platforms source, credit-check the potential borrower, facilitates the loan and automates (as much as possible) the process of lending and borrowing (inclusive of the legal and regulatory requirements) and takes a fee/commission for doing so.

This is what Banks have done with savers (depositors) money for many years, so there is nothing new about the process. What is new is the technology (platforms) that enables individuals who wish to lend money to connect directly with businesses and individuals that are looking to borrow do so more efficiently (at a lower cost) than the Banks.  In this way lenders on P2P platforms typically receive much higher interest rates for their money than they can presently receive from a savings account (because the higher Banks costs or ‘spread’ isn’t a factor). However, in cutting out the Banks lenders also remove the buffer from debtors that default, meaning the individual takes on the risks of not receiving the income/interest should the debtor be unable to pay it.

There are high potential rewards here, but there is also a higher potential to lose money. Businessagent.com recommends that you should not invest/lend money that you cannot afford to lose.

 

So how do I get an IFISA?

Some, but not all, of the peer-2-peer (P2P) lending platforms have an IFISA wrapper available. businessagent.com offers you the ability to see the UK P2P universe in one place. This makes it easier for you to get the information that you need to make an informed decision about whether or not P2P lending is right for you. Why not visit our comparison table? It offers the key information for all of the P2P platforms in one place, including if they offer an IFISA and default rates.

 

I’m still not sure, where can I learn more?

If you are hungry for more information the IFISA website is for you.  

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