What are the Main Rules of the Innovative Finance ISA?

Against a high inflationary environment, the Innovative Finance ISA (IFISA) has the potential to be a valuable addition to an experienced investor’s ISA portfolio, helping to diversify from cash and equities.

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Established in April 2016, the IFISA allows investors to hold peer-to-peer loans and debt-based securities and benefits from the same tax-free wrapper as its ISA siblings. As a result, investors are able to invest up to the £20,000 ISA allowance – as of 2022/23 – per year into the product without paying tax on any interest or capital gains.

The popularity of the IFISA has grown year-on-year, surpassing £1 billion in inflows, with £438 million invested in 2019/20 alone according to the latest HMRC data – a 33.5% increase on 2018/19. 

Offering target returns often in excess of 7% and allowing alternative assets to be held under the ISA wrapper for the first time, it’s unsurprising that the IFISA has been a hit with experienced investors. 

Read More:download the IFISA guide

This is particularly true now, as the tax efficiency of investments becomes increasingly important, and the Cash ISA fails to come close to keeping pace with soaring inflation, whilst the Stocks and Shares ISA showcases extreme volatility.

It’s clear that the IFISA is an important consideration, perhaps now more than ever. But before adding the product to your portfolio, there are important IFISA rules that experienced investors should familiarise themselves with. These are largely an extension of the ISA rules that were already in place prior to the IFISAs introduction, but there are some caveats.


The 10 core IFISA rules

  1. First and foremost, though more of a feature than a rule, the IFISA can hold peer-to-peer loans and debt-based securities. The specific underlying asset of an IFISA varies, but they can include property bonds, SME loans, and more. 

  2. The IFISA is governed by the annual ISA allowance, meaning investors can invest up to £20,000 into the product and reap the tax-free benefits.

  3. The annual ISA allowance applies to all different types of ISA taken together, not separately. As an example, if you invested £5,000 into a Cash ISA and £5,000 into a Stocks and Shares ISA, you would have £10,000 available to invest into an IFISA.

  4. You’re only able to contribute to one IFISA each year. Discover more about the intricacies of how many ISAs you can have here

  5. There is no limit to the amount you can transfer from another ISA into an IFISA provided the capital was accumulated under the tax wrapper in previous tax years, this is because ISA transfers are not governed by the annual ISA allowance. 

  6. When transferring funds invested into an ISA in the current tax year to an IFISA, you must transfer all of it. If invested in previous tax years, you can choose to transfer all or only a portion of the funds. 

  7. If you wish to transfer into an IFISA, you must follow the official ISA transfer process to ensure you do not lose the tax-free status of your funds. You should never attempt to transfer “manually”, by withdrawing and re-subscribing funds, as this removes capital from the ISA wrapper and re-subscribing will therefore contribute towards the current tax year’s ISA allowance. 

  8. You can not hold stocks and shares in an IFISA, meaning that if you wish to transfer a Stocks and Shares ISA, you must first liquidate the holdings so the ISA consists of just cash, which can then be transferred into an IFISA. 

  9. In contrast to the Cash ISA and Stocks and Shares ISA, the IFISA is not protected by the Financial Services Compensation Scheme (FSCS), a scheme that protects customers when authorised financial services firms fail by covering investments up to a certain amount.

  10. It’s important to remember the IFISA is an investment product, and returns can not be guaranteed. Whilst the IFISA is typically most suitable for experienced investors, it is recommended that everyone seek independent financial advice before investing.


The Innovative Finance ISA Guide

Originally published 17th July 2019, updated 18th October 2022.