For experienced investors, the Innovative Finance ISA (IFISA) can provide a tax-efficient means of investing into potentially lucrative peer-to-peer loans and debt-based securities, with all returns free from income tax and capital gains tax.
The IFISA is still a relatively new addition to the ISA market, introduced in April 2016 with the purpose of boosting the UK’s alternative finance sector and enabling investors to hold alternative investments under the popular ISA tax wrapper for the first time.
And as the IFISA grew 18% in 2018/19 – according to the latest data issued by HMRC – it’s clear to see it has become a popular option for experienced investors, providing a range of portfolio-enhancing benefits as detailed below.
1. Returns are shielded from income tax and capital gains tax
The main benefit of an ISA is the tax-free returns, and the IFISA is no exception. Whilst the exact potential rate of return varies depending on the provider and asset held – and no returns are guaranteed, as the IFISA is an investment product and capital is at risk – target returns are most often between 4% and 8%.
With the addition of no tax to pay, the IFISA offers experienced investors the potential to maximise returns – and this could be attractive to additional-rate taxpayers in particular, as the equivalent rate of return outside of a tax wrapper would need to be above 14%.
As the current ISA allowance enables investors to subscribe up to £20,000 per year to an IFISA (and that’s without accounting for ISA transfers), it’s no wonder an increasing number of experienced investors are choosing to add the often profitable product to their portfolio.
2. A range of IFISA-eligible assets allows for choice and diversification
Where some investment products allow minimal to no control over where funds are invested, the IFISA offers a range of eligible assets to choose from, so investors can allocate funds based on personal interests, financial preferences and/or portfolio goals.
The four main IFISA-eligible assets are:
Green energy projects
Whilst the IFISA was arguably most well-known for enabling tax-efficient investment into peer-to-peer lending for a time after its initial release, the number of IFISA-eligible property bonds and environment-focussed projects is on the rise – increasing the opportunities for building a balanced, diversified IFISA portfolio.
3. It is possible to invest into property via an IFISA
Both residential and commercial property are – and have been for some time – favoured assets among experienced investors in the UK, and investing into property bonds via an IFISA offers a hands-off, tax-efficient method of targeting the high rates of return often available through the sector.
At a time when tax changes have caused the profitability of buy-to-let to dwindle, but the housing market in particular is still indicating exceptional demand and proving to be an important investment consideration, experienced investors have the potential to reap the advantages of investing into property through a property-backed IFISA.
Due to hectic schedules and regular commitments, many experienced investors may be looking for access to the popular asset of property in a way that requires no hands-on involvement from themselves. This is possible with a property-backed IFISA, whereby investors can profit from the potential financial benefits of holding property in their portfolio, while bypassing the time consuming nature of owning – and renting – properties directly.
What’s more, the more direct route to property investing frequently means your funds are tied up in a single property, or a small number. With property bonds, risk can be mitigated as it is much more commonplace to have your funds support an entire development, of which there can be a mixed tenure of homes, further offering an opportunity to mitigate risk.
4. An IFISA offers the ability to invest for impact
Whether it’s through backing businesses and projects working to provide renewable energy, affordable housing or access to education and healthcare, more and more investors are looking to invest in a way that provides positive societal, environmental or economic impacts.
And now more than ever, the IFISA provides important, timely methods of doing so. This includes offering a vehicle to help assist in the bounce-back of the UK’s economy in the wake of the Coronavirus pandemic through supporting regional housebuilders in the provision of local jobs and much-desired housing, and aiding the ‘green recovery’ by backing the likes of renewable energy projects.
But even before the COVID-19 crisis brought about new instances in which the IFISA could be used for impact investing, the property-backed IFISA in particular was much-needed in tackling the UK’s unmet housing demand.
In a white paper published by the Government in August 2020 – which examines some of the key barriers and potential solutions to increasing housing supply in England – emphasis was placed on the need for small and medium-sized regional housebuilders to help address the ongoing housing crisis.
These small and medium-sized regional housebuilders are exactly those who benefit from the alternative finance provided via the property-backed IFISA – giving them access to the finance they need to assume their pivotal role in the development of new, affordable housing.
The benefits of adding an IFISA to your portfolio
With the potential of high, tax-free target returns, it’s no surprise experienced investors choose to include an IFISA in their portfolio.
The benefit of a tax wrapper partnered with control over where funds are invested, the option to hold property and the ability to invest for impact make the investment product an important consideration for experienced investors looking to maximise potential returns.
It’s important to note that the IFISA has a medium–high risk profile and is for experienced investors, and it’s advisable to seek advice from an independent financial advisor before making any investment decisions - but for the right investors, an IFISA can be a very welcomed addition to their portfolio.
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).