The Innovative Finance ISA means you’ll be able to invest in peer-to-peer lending platforms without paying any capital gains tax on your returns. Find out all about it and approach it carefully. Armed with the facts, it could be a new way for you to invest.1
As things stand today, investing via ISAs and investing via crowd- or peer-to-peer (P2P) lending are very separate, very different routes to the possibility of increasing your initial investment. But they’re coming together this spring.
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There are two types of ISA right now – stocks and shares and cash, allowing you to invest, or save depending on the ISA you choose. The annual ISA allowance is 20,000. From 6 April this year, the ISA game is changing to incorporate a new player – P2P lending platforms. So, there’s a third type of ISA to consider – the Innovative Finance ISA (called the IF ISA) which is, very simply put, a P2P investment in an ISA wrapper.
ISAs from 6 April 2016
If you decide to invest money in P2P lending, it’s possible to get back more than conventional cash savings. However, as with all investing, your capital is at risk. The Innovative Finance ISA is a new way of investing money in such schemes, the earnings you receive are not subject to the same tax treatments – if you’re unsure it’s always best to check with a financial advisor. So, as long as you stay within the ISA limits (£20,000), you’ll be able to split your savings between two or three different ISAs, or put all your pounds in one pot.
Risks and rewards of the Innovative Finance ISA
Cash ISAs carry no risk to your money, but offer lower interest rates than the riskier stocks and shares ISA. The general rule is: the more risk you’re willing to take, the greater the potential reward.
The new Innovative Finance ISA also carries risk. If the ‘peer’ you lend to doesn’t perform as expected, it’s you that bears the brunt of any losses, and those losses are final if they default on a payment. It’s no surprise then that with the greater risk comes greater opportunity – in some cases to earn up to 7% interest, completely tax free.
Some providers of the Innovative Finance ISA are currently providing assurance against any losses by covering defaults themselves, but the increased uptake of these products could make this more difficult.
Backed by government but not by the FSCS
The Innovative Finance ISA is a government savings initiative – a new option for savers. It’s unsurprising that P2P has been brought to the fore in this way, since the amount lent through such schemes has grown from £267million in 2012 for those looking to grow their money to £1.7billion in 2014.2
Some P2P platforms are fully licensed by the Financial Conduct Authority (FCA). But none are currently backed by the FSCS compensation scheme, so we’d say approach with caution.
To invest in innovative finance or not?
Like with any investment product, the key is to understand the risk and know what you can afford to lose. You can also use a mix and match approach if you’re new to investmenting, for testing out how P2P lending works, and deciding where to put your money next tax year.
Whatever you decide to do, tread carefully, and always seek advice if you’re not sure.
|As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek financial advice.|
1. Income Tax: Innovative Finance Individual Savings Account and peer to peer loans HM Revenue & Customs, 8th December 2015
2. Nesta Org – Understanding alternative finance November 2014