Innovative Finance is a comparatively new type of ISA (Individual Savings Account) introduced by the UK government in April 2016. Using with IFISA account investors can save more unique assets like crowd-funded unlisted corporate bonds, peer to peer loans, and loan notes within a tax-free wrapper. These new savings account got off to a slow state because of the time it took for peer to peer lending platform to get authorised by the Financial Conduct Authority (FCA) to offer IFISA. However, now there are many platforms that have the permission, including Kuflink, funding circle and Ratesetter that are largest IFISA providers in the UK.

The benefit of investing in debt-based investment opportunities like ISA is that people can get the interest returns they earn without having to pay tax and sell loans without paying any capital gains tax.

The key featue of an Innovative Finance ISAs are the high-interest rates it offers to pay. The peer to peer lending firms that offer these services advertise the annual returns of between 3% and 15%; however, with high interest rate the risk tends to be high as well. You do not need to invest your complete yearly ISA allowance that is £20,000 for 2020/21 into IFISA. You can invest a part of your funds into one or different ISAs types, for instance, cash ISA or stocks & shares ISA. Also, you can transfer an existing Cash ISA or stocks & shares ISA into an Innovative Finance ISA account. However, it is not possible to transfer stocks & shares ISA into an Innovative Finance ISA, so you will need to sell your investment funds to transfer the money as Cash ISA into an IFISA.

By putting your money in this new type of ISA, you can benefit by earning high-interest rate returns and get any interest you earn tax-free. This can be an important advantage in a low-interest-rate environment, particularly for people who have used up all their personal savings allowance. The personal saving allowance (PSA) for the 2020/21 is £1,000 per year for a basic rate taxpayer and £500 per year for a high rate taxpayer. The additional rate taxpayers who pay income tax of more than 45% do not have a personal savings allowance. The continuous search for extra income can be satisfied with peer to peer loans as their returns are usually around 6% annually and are tax-free within the Innovative Finance ISA wrapper.

Investments you can make within an Innovative Finance ISA

Debt-based securities

These include the loan notes or unlisted corporate bonds which have a fixed term, usually of one to three years. However, some can be for up to twenty years. Also, they make regular income payments that can be variable or fixed. Mainly this debt is utilised to fund small infrastructure projects like renewable energy project, and asset-backed companies such as care homes or pubs. Generally, they offer annual interest returns of between 5% and 8%. The bond issues are between £1m and £5m in size, and investors can start lending from as less as £5, the minimum may vary from issue to issue. The bond issues have to provide an offer document for every investment that is signed off by a platform with FCA authorisation.

Peer to peer loans

Peer to peer lending involves a process where investors lend directly to individuals and small businesses through an online platform. Since this is cheaper than traditional saving methods like banks, the p2p companies tend to offer better interest rates for both lenders and borrowers. The returns for lenders can vary, but usually they remain around 5% to 6%. Keep that in mind that like any other investment, your capital will be at risk if the borrowers default on repayments.

Like any other investment, it is essential to understand how this IFISA investment works completely. However, it is not difficult, so you don’t have to be a finance expert to make investments. Since everything is online, you can monitor everything. You have access to everything on your fingertips. It would be best if you found the right IFISA provider that offers service that fits your investment strategy. Overall, it is a great investment opportunity to look into if you are looking to make extra money and are not afraid to tie up your funds for long-term.