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. These ISAs have been available since April 6th 2016, however, the market has been quite slow to develop. In August (2016), the government confirmed that it would let people invest in certain types of bonds through innovative finance ISAs.
SAVVY TIP: A bond is just an IOU for a loan made to a company or government.
These bonds pay the investor a fixed return for a set period. The term of the bonds can be up to 20 years.
As with cash and stocks and shares ISAs, you don’t pay any extra tax when you cash in your innovative finance ISA.
Q. Who offers innovative finance ISAs?
A. Peer-to-peer lenders and crowdfunding platforms that let companies raise finance by issuing bonds, offer innovative finance ISAs. The government is currently consulting on whether or not to let crowdfunding platforms where companies let people invest in return for a stake in the company, issue innovative finance ISAs, but that’s not something that’s allowed at the moment.
Not all peer-to-peer lenders offer innovative finance ISAs. That’s because they have to be fully authorised by the regulator, the Financial Conduct Authority, and it’s a process that takes some time.
Abundance: does offer an innovative finance ISA You can invest from £5 up to the full ISA allowance.
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. The limit rose from £75,000 to £85,000 on January 30th 2017.
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 current tax year (2017-18) 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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