What are the main rules of an Innovative Finance ISA?

By Grace Matthews17th July 2019

Innovative Finance ISAs (IFISAs) were introduced in April 2016 as the latest addition to the Individual Savings Account (ISA) family.

Article main image

The Innovative Finance ISA (IFISA) is now a fully established member of the ISA family. It joins the Cash ISA, Stocks and Shares ISA, Lifetime ISA and Junior ISA.

The IFISA boasts the same tax wrapper as its ISA siblings, meaning you can invest up to £20,000 in the 2020/21 tax year without paying tax on interest or capital gains. 

An IFISA allows investors to use their annual ISA allowance to lend funds through the peer-to-peer (P2P) lending market and buy other debt-based securities.

They're attracting rapidly growing interest from investors. As of April 5th 2017 - 12 months after launch - their total market value was £46m. A year later this had leaped by nearly eight-fold to £366m, and in 2019 the IFISA market surpassed the £1 billion investment mark. 

Read more: download The Innovative Finance ISA guide

So, it's clear that IFISAs are worth taking a look at as part of a balanced and diversified investment portfolio, but before you do, you should familiarise yourself with some of the basic IFISA rules. These are largely an extension to the ISA rules that were already in place before the introduction of the IFISA, but it's important you understand any alterations and additions. 


The main 14 rules

  1. IFISA investors are able to lend money via the ISA without having to pay any income tax on the interest they earn.

  2. While you’re free to invest via multiple P2P lending platforms, you can only contribute to one IFISA account per tax year, and only one IFISA account can be opened per platform each year. Find more detail on how many ISAs you can have here.

  3. The ISA allowance - which is £20,000 for the 2019/20 tax year - applies to all of your different types of ISA taken together, not separately. So if you have more than one kind of ISA, you’ll have to decide each year what share of your allowance will be allocated to each one.

  4. There’s no limit on the overall amount of cash that you can transfer into your IFISA from other ISAs, provided it has been accumulated within the ISA regime over previous tax years.

  5. If you've got cash in other ISAs and would like to move them into an IFISA, you can do it easily by authorising your new ISA provider - this will require completing an ISA transfer authority form. Your money will then be transferred directly from your old ISA provider to your new IFISA, and it should take between 15 and 30 days to process. You may be subject to transfer fees or early termination penalties depending on the provider.

  6. You can’t hold stocks or shares in an IFISA, so you can’t transfer in existing investment holdings from a Stocks and Shares ISA. You would have to instruct the Stocks and Shares ISA platform provider to liquidate the holdings within the ISA before transferring the cash proceeds into the IFISA for reinvestment.

  7. There’s currently no provision under HM Treasury rules for transferring existing P2P loans into an IFISA.

  8. It's important to distinguish between funds subscribed into another category of ISA during the current financial year and those accumulated over previous financial years, as the latter aren’t subject to the same level of restrictions in terms of transfers. For example, if you’ve subscribed £12,000 into a Cash ISA during the current tax year, you are entitled to transfer this balance into an IFISA - provided you transfer the balance in full - including any interest earned on those subscriptions. In this example, your remaining ISA allowance for the year would still be £8,000. If you then wished to contribute some or all of your remaining ISA allowance to an IFISA during the same financial year, you could only do so into this same IFISA with your chosen provider. This is because your original subscription to the Cash ISA will be deemed to have been made into the IFISA, and you’ll have been deemed to have subscribed the money to this IFISA all along.

  9. You should never attempt to transfer funds between ISAs manually. If you do, you risk losing the tax free ISA status of those funds.

  10. Regular debt crowdfunding - or P2P lending - can be included in an IFISA, but equity-based crowdfunding securities are excluded.

  11. Debentures and certain other debt-based securities including fixed term property bonds can now be included in an IFISA. 

  12. Unlike Cash ISAs, IFISAs aren’t covered by the UK’s compensation fund, known as the Financial Services Compensation Scheme (FSCS). The FSCS protects customers when authorised financial services firms fail, by covering investments of up to £85,000 in a Cash ISA, and up to £50,000 for a Stocks and Shares ISA - though it's important to remember that this only protects you if the ISA provider fails, you are not protected from any market fall in the value of your investments. 

  13. Rules introduced by the Financial Conduct Authority (FCA) from January 1st 2020 regarding the promotion of speculative mini-bonds state that only experienced investors (sophisticated, high-net-worth or professional) are eligible to invest into mini-bonds, which the FCA describe as 'where a company raises money from investors with the intention of lending the money to a third party or investing in other companies, or property.'

  14. Investors are not able to have more than 10% of their assets in P2P investments unless they’ve taken financial advice. This is to prevent investors from taking excessive risk, and under the rules imposed by the FCA, platforms will be required to assess a client’s knowledge and experience of peer to peer platforms before allowing them to invest.

Read more: what is the best Innovative Finance ISA available?



IFISAs can be a useful and valuable addition to an investment portfolio, so it’s worth taking some time to master these rules to see whether an IFISA could be appropriate for you. 


The Innovative Finance ISA Guide

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).


Originally published 17th July 2019, updated 6th May 2020.