Innovative Finance ISAs (IFISAs) have been around since April 2016, when the government introduced them as a means of strengthening and progressing the UKs alternative finance market.
After hitting the £1 billion in investments milestone in 2019, IFISAs are likely to see continued growth in popularity. With this comes changes in rules and regulations, in an effort to continuously improve the growing sector.
The start of a new tax year is a time when investors, who have the benefit of a reset ISA allowance, are looking for new investment opportunities and tax-efficient ways of making their money work harder - so it’s important that they’re clued up on the IFISA rules and any changes that might be welcomed in the new tax year.
Changes to the ISA allowance in the 2020/21 tax year
The reset of the annual ISA allowance is something that most investors look forward to each year, and even though it has sat at £20,000 since the 2017/18 tax year (when it rose from £15,240), it is subject to change.
The allowances for Adult ISAs (Cash, Stocks and Shares and Innovative Finance) generally correspond with the overall ISA allowance, meaning the maximum you’re allowed to subscribe to an Adult ISA is the entirety of your annual ISA allowance. This is in contrast to Lifetime ISAs, where the maximum you’re allowed to subscribe per year is £4,000.
We won’t know if the ISA allowance for 2020/21 is going to change, or stay at £20,000, until the Budget is announced on 11th March 2020, so it’s important that you keep an eye out.
Knowing and understanding your ISA allowance is crucial. One obvious reason for this is so that you know how much you’re able to save and/or invest within the generous tax wrapper, but it’s also important to consider where you’re going to allocate your allowance, and how much of it you’re going to subscribe to which ISA product.
Read more: preparing for the new tax year: how many ISAs can you have?
The existing IFISA rules
There are yet to be any changes to the existing IFISA rules announced, so it’s important that you either brush up on them (if you’ve previously invested into an IFISA) or become accustomed to them (if you haven’t);
1. The first rule - or feature - is that an IFISA can hold peer-to-peer (P2P) loans and debt-based securities. P2P loans are loans made to individuals (consumer lending) or companies (SME lending) by investors through an online platform, and debt-based securities are asset-backed investment opportunities that allow investors to invest into projects - such as property or green energy.
2. Again, this is more of a feature than a rule, but it’s incredibly important - through an IFISA, there is no tax to pay on any interest or capital gains.
3. Only one IFISA account can be opened and contributed to per platform, per year.
4. The maximum amount that can be invested in an IFISA per year currently corresponds with the annual ISA allowance, which is £20,000 in the 2019/20 tax year but is subject to change.
5. If you want to transfer funds from other ISAs to an IFISA you can usually do so by completing a transfer authority form. It’s important than you complete this form and follow the process set out by your ISA provider when transferring - if you don’t, your money could lose its tax free status. All providers will have their own rules when it comes to making transfers, so don’t assume that you’ll be able to do so without contacting your provider directly.
6. There’s no limit to the amount of funds you can transfer into an IFISA - as long as they have been accumulated within the ISA tax wrapper in previous years - and these funds won’t count towards your annual ISA allowance.
7. You must instruct your Stocks and Shares ISA provider to liquidate any holdings before transferring the cash proceeds into an IFISA as an IFISA can’t hold stocks and shares.
8. When transferring money into an IFISA from another ISA account that was subscribed in the current tax year, you must transfer all of it. However, if you’re transferring money subscribed in previous tax years, you can choose whether to transfer all of it or only some of it.
9. In contrast to Cash ISAs and Stocks and Shares ISAs, IFISAs aren’t covered under the Financial Services Compensation Scheme (FSCS). The FSCS protects customers when firms authorised by the Financial Conduct Authority (FCA) fail, covering up to £85,000 (if you meet the eligibility criteria). It’s important to note that Stocks and Shares ISAs are only protected by the FSCS if the provider fails and does not have the funds to meet your compensation claim - they’re not covered for any poorly performing investments.
Understanding the IFISA rules
Take some time to get your head around these rules, because they’re likely to have an impact when deciding whether an IFISA is right for you and your investment portfolio.
Read more: how to determine whether an Innovative Finance ISA is right for you
Whether you’re looking to use your 2020/21 ISA allowance to invest in an IFISA for the first time, or you’re topping up an existing IFISA, it’s important that you’re aware of the IFISA rules - and any changes to them - to make sure you’re making the most of the tax-efficient product that offers experienced investors an attractive investment opportunity with high target returns.
The CARLTON Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).