Over the past two years, the UK landscape of Innovative Finance Individual Savings Account, also known as IFISA, has continued to gain momentum. Since the introduction of IFISA in 2016; as more and more investors who are willing take higher risks and in return for higher earnings, have invested in in an IFISA.
For small business enterprises (SMEs), IFISA could potentially present the best of both worlds given that, both the investor and the borrower cutout the “middleman”, the bank, enabling direct transactions through the peer-to-peer (P2P) finance market.
What is IFISA?
IFISA, which is regulated by the Financial Conduct Authority (FCA), was introduced by the UK Government in April 2016, to allow investors to lend funds to individuals, businesses or property developers and obtain interest and capital gains tax-free.
Peer-to-peer lending platforms match up investors seeking high returns with borrowers through an online portal of FCA regulated P2P lenders. The projected rate of interest to be gained by investors vary from one P2P lender to the next, with some lenders offering up to 16%, depending on the term and level of risk selected by the borrower.
How does IFISA work?
In the 2018-19 tax year, investors can save up to £20,000 in an ISA. The ISA can consist of one account, it can be a mixture of Cash, stocks and shares or an IFISA. Therefore, to use up your annual allowance of £20,000, you could split your investments are follows:
- £8,000 into a cash ISA
- £6,000 into a stocks and shares ISA
- £6,000 into an innovative finance ISA
You can use the calculator on QuickISA for a quick estimate of how much you could earn on your investment.
It is important to note that you can only open one new IFISA with one single provider each tax year. If you already have a cash ISA or a stocks and shares ISA, you can also transfer any money from that account into an IFISA offered by a P2P provider. However, at present, you will not be able to transfer any existing P2P investments into a new IFISA when the provider you invest with launches one.
You could potentially do so by selling your P2P investments, which would incur early exit charges, and then start the whole process again at whatever new rate applies at the time.
A summary of the benefits offers by IFISAs:
Benefits of investing in an IFISA
- Acts as the bank manager, cutting out the middleman
- Great for long-term savers
- Offers much higher rates of interest / high return on your investment
- Tax free savings
Benefits of borrowing through IFISA
- Acts as the bank customer without the extra difficulties associated with loan application via the traditional banking systems, thereby cutting out the middleman
- Easier access to business loans through P2P lending
- Access to credit at much lower rates on loans than traditional finance market
Real examples or peer-to-peer loans paid out by the UK Government include:
|Borrower||Reason for borrowing||Amount borrowed|
|Bramley and Cage, a manufacturer of gin and fruit liqueurs||Borrowed from 248 people including the UK Gvt. to purchase a new gin still to increase production.||£25,000|
|Moo Free Chocolate, a manufacturer of dairy free and gluten free chocolate||Borrowed to purchase machinery and ingredients to increase production||£60,000|
|Kaizen, a luxury furniture manufacturer||Borrowed to expand and fuel growth||£100,000|
How Risky are IFISAs?
Although the potential earning offered by an IFISA typically substantially higher, the investment come with a certain level of risk and you could lose your capital with no protection from the Financial Services Compensation Scheme (FSCS). One of the most immediate risk is that your borrower may fail to pay back the loan, which is known as defaulting. To mitigate the impact of such a risk, it is advisable to split your investments across different borrowers.
Investors are also advised to do their due diligence by conducting their own research to ensure that any potential IFISA provider is approved and regulated by the FCA. If you are still in doubt, you can consult an independent financial advisor or alternatively, you could also opt for a Fixed Rate ISA which allows you put away a lump sum in return for a tax free higher interest rate.