4 Ways to Make the Most of Your IFISA

But whilst the amount invested per IFISA account also rose to £8,520 in 2021/22 from £5,750 in 2020/21, the 2016 addition to the ISA market is still somewhat underutilised and undervalued. 

To fully appreciate its value, it’s worth noting that some property-backed IFISAs target returns of up to 10% p.a. for investors, and the Gross Equivalent Return of 10% outside the IFISA’s tax-free wrapper is 18.18% for additional-rate taxpayers.

Though it’s clear that the IFISA has the potential to target often inflation-beating, tax-free returns for experienced investors with the appropriate risk appetite, there are four things to keep in mind to truly make the most of all the IFISA has to offer.

1. Utilise the IFISA as part of a diversified portfolio

As an experienced investor, you’re likely already aware of the importance of a balanced, diversified portfolio to spread risk. With a range of other ISA products on the market (Cash ISA, Stocks and Shares ISA and Lifetime ISA) and the ability to spread your ISA allowance across multiple products, it’s easy to ensure your ISA portfolio is well-diversified. 

And the IFISA can play a vital role here. The IFISA is the only ISA product that allows alternative assets – those uncorrelated with more traditional assets – to be held within the tax wrapper, and when part of an ISA portfolio that includes cash and equities, the IFISA has the potential to aid in combatting volatility through diversification. 

The recently released HMRC data reported that Cash ISA subscriptions fell in 2021/22, from 8 million the year before down to 7.14 million. 

This is unsurprising given the rock-bottom low rates available over the past few years, though these rates are now beginning to increase after a number of Bank of England (BoE) base rate hikes.

What’s more, the volatility of the equities market, and therefore the Stocks and Shares ISA, has also been highly evident in recent years. As a result of both of these factors, many experienced investors have looked to the likes of the IFISA for more attractive and stable – though importantly not guaranteed – returns. 

But both the Cash ISA and Stocks and Shares ISA are still a key part of a portfolio, and it’s crucial to remember that each product is useful for different purposes and goals – again highlighting the benefits of a diversified portfolio.

2. Consider choosing an impact-driven underlying asset

It’s increasingly evident that as well as aiming to build wealth, investors are also looking for investment opportunities that have a positive impact in a societal, economic or environmental way. 

The property-backed IFISA has the potential to do both. Property bonds provide small and medium-sized housebuilders with the finance required to deliver much-needed housing at a time when there simply aren’t enough homes being built to keep up with demand. 

And when held under the IFISA tax wrapper, they can also generate potential returns of up to 10% p.a., completely tax-free. 

As a result, not only does investing into a property-backed IFISA allow you to make the most of one of the most generous tax incentives available to investors in the UK whilst gaining exposure to the ever-popular asset of property, they also enable you to make a positive impact with your capital.

3. Think about reinvesting your earnings

One of the key advantages of an IFISA is the ability to reinvest your returns without incurring any tax liabilities. 

Instead of withdrawing your returns – which would remove their tax-free status – consider reinvesting them back into your IFISA whereby you will benefit from the power of compounding, where your reinvested earnings generate additional returns. 

Over time this has the potential to significantly boost your overall investment growth and help you achieve your goals faster.

4. Remember ISA transfers can be useful in rebalancing your portfolio

ISA transfers are arguably one of the most under-utilised yet beneficial features of an ISA, allowing you to move funds from one ISA to another without affecting your annual ISA allowance. 

And for experienced investors who are either looking to add an IFISA to their portfolio for the first time or increase the IFISA’s weighting in their portfolio, an ISA transfer is an excellent tool for enabling them to do so. 

Whether you’ve already used your current year’s ISA allowance in full and would therefore like to move funds from another ISA to an IFISA to gain exposure without having to wait for the allowance to reset, or you’re disillusioned with the performance of your Cash ISA or Stocks and Shares ISA and would like to reduce their weighting by transferring to an IFISA, an ISA transfer makes this possible.

Using an IFISA to its full potential

Its tax-free wrapper, attractive target returns and ability to hold alternative assets that are uncorrelated with the more traditional markets make the IFISA a key consideration for experienced investors. 

And with multiple methods to really use the product to its fullest potential, it could prove a powerful and rewarding addition to a balanced ISA portfolio.

Originally published July 2023, updated March 2024.