Innovative Finance Individual Savings Account (IFISA)

In the 2014 Budget, Chancellor George Osborne announced that innovative finance investments would become eligible to hold within a tax-advantaged Individual Savings Account (ISA) from 6 April 2016. Innovative Finance refers to a range of ways for individuals and businesses to borrow money or raise equity from individuals who seek alternative ways to invest, such individuals are usually retail investors and often referred to as the “crowd”. While equity crowding funding and Peer-to-Peer (P2P) lending are the most common financing channels that fall under innovative finance, at the moment the scope of of the IFISA only extends to Peer-to-Peer loan platforms. Investments made through equity based platforms cannot be held in an ISA and taxes would be levied on dividends and capital gains.

Peer-to-Peer Lending

P2P lending is a cost efficient way to finance personal loans and small business debts. P2P providers are often called platforms as they typically operate online to minimise various costs. By removing the bank as a middleman, P2P platforms are able to deliver a greater potential return to investors and a lower rate to borrowers. This method of finance has in fact existed for more than a decade and has raised more than £6 billion in the UK since inception. Although only platforms that have full FCA permissions can offer IFISA products, such investments are typically perceived as more risky than mainstream debt securities. Furthermore, the P2P industry is currently not covered by the Financial Services Compensation Scheme, meaning there is no guarantee to recover capital loss in the event of borrower default or the platform ceased to exist.

IFISA – All You Need to Know

How it Works

Available from 6 April 2016, investors will be able to hold P2P loans in their ISAs in addition to Cash and Stocks & Shares, subject to the annual ISA limit (£15,240 for 2016/17, increasing to £20,000 in 2017/18). The new IFISA works in a similar way as Cash and Stocks & Shares ISAs, allowing individuals to hold P2P loans in a tax-free wrapper, where the platform acts as the ISA provider. There are some rules and regulation differences to accommodate the nature of P2P, covering issues such as withdrawing and transferring, and some kinks to be ironed out.

When the announcement of the IFISA was first made, it was believed that investors would only be able to access one platform per IFISA. However, on March 14th, the Treasury issued an amendment that allows investors to include aggregator platforms, in which several P2P lending platforms can be chosen via an ISA manager who has curated a list of platforms for inclusion in their ISA wrapper.

Investors and their advisers should also beware that in a given tax year, withdrawing money from an IFISA opened that year and reinvesting in another platform would reduce one’s annual ISA allowance by that amount. However, any interest gained from the former platform would still be free from tax.

If an IFISA holder wants to lend through a new platform but does not want to lose the existing tax benefits, he/she should make new contributions to the new platform in the next tax year (subject to the ISA allowance). In addition, the current legislation states that pre-existing P2P investments cannot be transferred into the new IFISA wrapper.

The good news is that investors who wish to hold multiple IFISAs can do so by switching money in pre-existing ISAs accumulated over previous tax years to an IFISA. For instance, if an investor had £50,000 in Cash ISAs and another £50,000 in Stocks & Shares ISAs they could transfer some or all of these funds into one or more IFISAs this tax year. In essence, doing this is a workaround that removes the ISA allowance upper limit and enables diversification across multiple platforms. Advisers should be aware that transfers need to be carried out by the new ISA provider – withdrawal and reinvestment would cause the fund to lose its ISA status, so a specific process must be followed to maintain the tax benefits.

Some Further Considerations

Advice

The FCA has raised concerns over advisers’ ability to comply with the FCA requirements on P2P due diligence. In a policy statement issued on the 21 March, the FCA stated, “They [the respondents] argued that, as a result of the difficulty in being able to measure risks associated with P2P agreements, there would be limited interest from existing advisers in advising on P2P agreements, and that these were likely to remain ‘non-advised’ investments unless this situation changed.”

Platform Readiness

Another headline has been the requirement for platforms to have their full FCA authorisation and ISA manager status from HM Revenue & Customs before being able to offer an IFISA product. With the majority of the largest platforms still operating under their interim permissions, many were not ready for the 6 April 2016 launch. At the time of writing, only two platforms have obtained the ISA manager status. We have included a directory of P2P platforms with their IFISA status and FCA status at the time of writing at the end of this article.

Multi-Platform ISA

With many platforms still not eligible to offer an IFISA product diversification across platforms will be difficult for the time being.

However, as mentioned above one way forward here could be is to invest through an aggregator platform. Aggregators perform due diligence on the other P2P platforms and offer investors access to loans from their vetted platforms. Bondmason, LendingWell and Goji are examples of platform aggregators either in the market or planning to launch at the time of writing. HMRC has confirmed a regulated ISA manager can pool loans that offered by several P2P platforms into a single IFISA. An IFISA investment option is available from all three of the aggregator platforms mentioned above.

Further Consultations

In November 2015, the Treasury confirmed that it would extend the list of qualifying investments for the IFISA to include crowdfunded debt securities issued by companies. Abundance, UK Bond Network and Wellesley & Co are examples of platforms that offer such investments. The scope of the IFISA currently does not extend to equity-based crowdfunding platforms. However, the government is working with the sector to explore the possibility of making equity crowdfunding qualify for the ISA status.

Financial Services Compensation Scheme

Lastly, note that platforms will still not be covered by the Financial Services Compensation Scheme (FSCS).

Key Rules and Regulations

• Any UK taxpayer aged 18 or over can apply for the new IFISA
• No immediate plan to introduce a Junior IFISA for under 18s
• Only FCA authorised firms can provide advice on P2P loans, but an authorised firm does not need additional authorisation to advise on P2P loans
• Advisers must consider the suitability of P2P loans to their clients and form their own opinion of the risk of such investments
• Commission is banned on these products for advisers
• The ISA rules require IFISA managers to be approved by HMRC
• Advised customers can have access to the Financial Services Compensation Scheme (FSCS) and Financial Ombudsman Service (FOS) to protect them against failures of authorised advice firms
• The P2P platforms themselves, and the underlying loans that they make, are not covered by the FSCS
• Independent advisers will not have to consider P2P investments to retain their status under the independence rules.

P2P Platform Summary