Since the Inception of peer to peer (p2p) lending the sector has propelled to the investment and economic mainstream, particularly since the economic slump of 2008. Since Bank of England rates have plunged the returns on savings also dropped. Whereas the stock market, Property Finance in the UK and many other high-risk Investments have ever since become characterised mostly by volatility.
Overall this has produced a space for better value investment opportunities providing stable returns. Peer to peer lending in this regard has stepped up to the plate and the credit of this upward path has come in the form of Innovative Finance ISA (IFISA).
What is IFISA?
An Innovative Finance ISA is referred to as p2p lending ISA, p2p ISA or an IFISA. It is a comparatively new type of individual savings account which allows the UK customers to profit from the tax-free interest rate on their p2p loans. IFISA is a separate category of the ISA, generally which is known to sit anywhere between stocks and shares and cash ISA in terms of reward and risk.
What returns are attainable with IFISA?
Interest rates of return on high-interest ISA vary significantly, even though generally an individual can expect to get between 4 to 7% interest from an IFISA offered by a major p2p lending platform. Same is the case with any type of investment, any higher-yielding IFISAs available but they tend to carry greater risk.
Even though the main problem is subject to individual platform discretion, majority of p2p platforms provide the same frontpage return rate on IFISA wrapped peer to peer loans and regular peer to peer loans, so selecting this kind of wrapper carries clear, equal gains in this respect.
Benefits coma allowances and tax efficiencies
Before the introduction of Innovative Finance ISA in the year 2016, majority of investors were needed to declare peer to peer income to the HMRC, usually through a self-assessment of tax return, along with the profits being taxable at the marginal rate of an individual. however, with the launch of IFISA a lot of investors take peer to peer profits out of tax entirely.
What are the benefits of IFISA?
In Simple terms, the inferences of opening an Innovative Finance ISA from a tax point of you are significant. With Innovative Finance you can shield all the peer to peer income from tax and almost £20000 can be subscribed every year across all the three categories of ISA. However, keep in mind that the annual allowance does not include the transfer of funds secured in the previous years. Nor does the annual ISA include interest which is compounded and earned. Therefore, all the profits can take place in the wrapper without using up any portion of an individual’s ISA allowance.
Can I transfer the ISA subscriptions of the previous year?
When the tax year comes to its end those ISA funds can be treated differently. Unlike the funds which are subscribed during the existing financial year, there is no restriction or limit on the amount that you can transfer, nor on the number of ISAs, you can transfer the amount into, regarding the funds of the previous year. This is applicable whether you are transferred between the ISAs of the same class or between different types of ISA.
For example, if you have collected £50,000 in shares and stocks or cash ISA over the years then there is nothing that can stop you from transferring any or all the amount into an Innovative Finance ISA. In fact, you can transfer this amount into as many Innovative Finance ISAs, through as many Innovative Finance ISA providers as you want, all in the same tax year. Essentially there are no limitations if the funds were subscribed into an ISA in the previous financial year.
What is a Personal Savings Allowance (PSA)?
Taxation on peer to peer returns can be further decreased or even removed completely from tax through the PSA. The PSA means that for the basic rate taxpayers up to £1,000 of savings interest and/or the p2p income can be shielded from tax every year. For the high rate taxpayers, this figure drops to £500, whereas additional rate taxpayers are not entitled to a Personal Savings Allowance. Usually depending on the p2p earning of 5% p.a., this would allow up to £20,000 to be held outside an IFISA tax-free.
Is an Innovative Finance ISA right for you?
Like the majority of the investments, it is up to you to assess the risks compare to rewards and to make a well-informed decision from there on. However, the stable and competitive returns provided by Prime UK p2p platforms have already become a major driver of peer to peer lending’s potential growth. Additionally, the high standards of p2p loans underwriting and a progressively evolving track record is the reason that p2p lending is stacking up increasingly like a standout asset class.
It is significant to remember that before you invest in an Innovative Finance ISA, your money is at risk and it won’t be covered through the Financial Services Compensation Scheme (FSCS). If you invest in an Innovative Finance ISA, then it is not the same as a cash ISA which provides security however for usually lower returns.
The Platforms reduce the higher level of risk with their own security procedures, for instance, by utilising security, provision funds and insurance against a borrower default, however eventually it is significant that all investors are aware that the returns are not always guaranteed.