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Innovative Finance Individual Savings Allowances (IFISAs) are still a relatively new initiative. Launched by the government less than 5 years ago in April 2016, an IFISA allows you to make peer-to-peer (P2P) lending investments with interest that is earned not subject to any tax.
Viewed as a new route to becoming an investor, IFISAs offer you the opportunity to lend money to consumers, businesses, infrastructure developments or other projects, and enjoy tax-free interest on repayments in return. For the most part, the lending available to you is peer-to-peer lending, which means you lend directly to borrowers and not to a middle company that then lends to these borrowers.
It's important to think about whether an IFISA is the right product to help you to achieve your financial goals. If you simply want to save money with as less risk as possible, then you might prefer a Cash ISA which is protected by the Financial Services Compensation Scheme. On the other hand, if you aren't worried about risk and you want to beat inflation, then an IFISA could be right up your street.
In this handy guide, we list the advantages and disadvantages of the IFISA, which are currently on offer. Obviously, before proceeding it is wise to seek independent professional advice. Remember, when investing in P2P, your capital is at risk.
Advantages |
Disadvantages |
Interest earned from lending is tax free and remains so, regardless of how much your pot of money grows over the years. |
There is a risk that you may lose your money. Remember, capital is not protected by the FSCS. |
You can avoid being taxed on any capital gains that you accrue. |
Interest rates can be affected by many factors, such as bad debts and liquidity. |
You do not have to report your peer-to-peer (P2P) earnings to the taxman, or anywhere for that fact. |
Default rates could be affected in the event of an economic downturn, which could affect yields. |
You can transfer money from cash ISAs that you contributed to in previous tax years into any number of new IFISAs that you like. |
Losses within the IFISA cannot be offset against capital profits - this is due to the fact that it is already within a tax-wrapper. |
You can support entrepreneurs and growing businesses via your investment. |
The returns that are advertised are certainly not guaranteed - so whilst your provider might say that you will get 6% - they will almost certainly say ‘up to’ 6%. |
In the 2020-21 tax year, you can save up to £20,000 into an Isa. This can be a mixture of cash, stocks and shares or an innovative finance Isa. So, to use up your allowance, for example, you could put:
Investors can only open an IFISA through HMRC authorised platforms. For platforms to be authorised by HMRC they have to be authorised by the Financial Conduct Authority (FCA). Equally not all investors are eligible. Investors have to be over the age of 18 (IFISAs are not eligible for the Junior ISA) and UK residents (excluding the Channel Islands and the Isle of Man).
Use the below table to compare IFISA rates by P2P lending marketplaces and other providers, and find details on how to apply.
For more details on each of these lenders, you can visit the Peer-to-Peer section of our website.
Tagged: IFISA Investment P2P
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