An innovative finance ISA lets you earn interest from peer-to-peer lending tax free. They may appear similar to cash ISAs, but an innovative finance ISA is riskier.
Q. What is an innovative finance ISA?
A. An innovative finance ISA is an ISA that lets you lend money through peer-to-peer lending or crowdfunded loans. The ISA providers offer ‘bonds’ or debt from companies or projects that want to raise finance. These pay interest – either on a regular basis as income, or at the end of the term. The riskier the company or project is perceived to be, the higher the interest rate you’ll earn. You can generally earn a higher rate of interest than you would if you put your money into a cash ISA.
SAVVY TIP: Money that’s invested via innovative finance ISAs isn’t covered by the Financial Services Compensation Scheme, which protects bank and building society savings.
As with cash and stocks and shares ISAs, you don’t pay any extra tax when you cash in your innovative finance ISA.
SAVVY TIP: A bond is just an IOU for a loan made to a company or government. Bonds are riskier than cash because, if the company issuing them goes bust, you won’t get your money back. Innovative finance ISAs let you invest in other types of debt as well, such as debentures, which essentially means you’re buying the company or organisation’s debt.
RISK ALERT: Be aware that the companies and projects whose debt you may be buying or whose bonds you may be investing in may be quite young and operating in risky sectors. They may also be much harder to trade, or impossible for you to cash in if you need your money before the term is up.
Q. Who offers innovative finance ISAs?
A. Peer-to-peer lenders and crowdfunding platforms that let companies raise finance by issuing bonds or either types of loans, offer innovative finance ISAs. Not all peer-to-peer lenders offer innovative finance ISAs.
Here’s a list of providers that currently offer innovative finance ISAs. Please note that I’m not endorsing these providers, instead I’m aiming to provide a comprehensive list of who offers what.
Ablrate: The ‘abl’ in Ablrate stands for ‘asset backed loans’. Ablrate’s website says that its expected returns are 7 – 15%. However, it does also point out the risk that you might lose some or all of your money – in some detail. Your money will be invested in businesses.
How it works: You can invest from £100 in an Ablrate ISA. You can see details of the business and what it wants to borrow the money for, before you decide to invest. If you want more flexibility about how long you invest your money for, you can invest through a portfolio loan. This could be in one company or several different companies (which spreads the risk but also reduces the potential return). With a portfolio loan, you may be able to sell your loan to another investor.
Abundance: offers investments in tradeable debentures. Some of the projects that Abundance customers have invested in in the past include a company that produced energy from used cooking oil and a combined heat and power plant in Hereford.
How it works: You can invest from £5 and the money you invest is lent to specific companies or projects that aim to do ‘good’ as well as deliver a profit. Some investments pay a regular income, others pay a return when the project is successful. Investment terms last from one year to 18 years, depending on the project. You can see the available investments on Abundance’s website, but when I looked, there was only one investment project that was currently available for funding. All the others had been fully funded.
Advancr: issues bonds, loans and debentures secured against Triple Point Advancr, which is a leasing and lending business.
How it works: You have to invest at least £1,000, and the investment terms run from one to three years. Only certain people, such as ‘high net worth’ investors, what’s called ‘sophisticated’ investors (a term I don’t like, but it means investors who are comfortable and able to take a fair amount of risk) are able to invest via Advancr.
Crowd2fund: offers an innovative finance ISA
Crowdstacker: offers an innovative finance ISA
Funding Circle offers an innovative finance ISA.
Ratesetter: offers an innovative finance ISA
Zopa: offers an innovative finance ISA. Zopa’s ISA pays a target interest rate of 4% in its Core ISA or 4.6% in its ISA Plus. There’s a 1% fee when you’re selling your loans. The Core ISA lends money to people for up to five years, who’ve been given a risk rating of A* – C. The ISA Plus lends money to people who’ve been given a risk rating of A* – E. As it includes riskier individuals, the overall risk level is higher.
There’s a minimum initial investment level of £1,000 for each ISA. You can withdraw money from your ISAs if it’s been paid back by borrowers. But if you want to take out a lump sum, you’d have to sell your loans to someone else, and you’d be charged a 1% fee for that.
Q. How risky are innovative finance ISAs?
A. They are riskier than cash ISAs – quite a lot riskier. For a start, your money is not protected in the way it is with cash savings – namely, if the bank goes bust, you’ll get your savings back, up to a limit of £85,000, as long as the bank is covered by the UK’s Financial Services Compensation Scheme.
There are other risks. If you lend money to a person or a company through peer-to-peer lending and they cannot pay you back, you may lose your money. Some peer-to-peer lending platforms have contingency funds that cover losses, not all do.
Another risk is that if you take out a bond with a company through a peer-to-peer lending or crowdfunding platform, and you want to sell your bond, the market may be limited. If the company goes bust or it doesn’t generate the returns it’s expecting, your bond could be worth less than you bought it for.
Q. How much can I invest in an innovative finance ISA?
A. You can invest the maximum amount into an innovative finance ISA. In the tax year 2019-20, it’s £20,000. You don’t have to put the full amount into an innovative finance ISA. You can split your money between cash, stocks and shares and innovative finance.
Q. How many innovative finance ISAs can I have in one year?
A. You can invest in one innovative finance ISA in each tax year. So, if you took one innovative finance ISA out with Zopa (for example) in one tax year, you would have to wait until the following tax year to take one out with another peer-to-peer lender.
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