Innovative Finance ISAs have been the top performing ISA for property investors in recent times. Here, Derek Pratt, commercial director at Sourced Capital, looks at how investors can benefits.
The introduction of the Innovative Finance ISA (IFISA) in 2016 to advance the growing alternative investment market has, without doubt, made peer-to-peer lending even more attractive as an investment option.
An IFISA is a type of individual savings account that allows you to invest up to £20,000 every year into peer-to-peer (P2P) lending and enjoy the benefit of all the interest earnt from that investment being tax free.
An IFISA works by lending your money to personally selected borrowers in return for a predetermined rate of interest, with that loan being managed by a P2P platform. You have the option of selecting which borrowers and projects you wish to invest into, on the understanding that the borrower commits to repaying all capital and interest in keeping with the terms of the loan agreement.
Over the past four years, it is the IFISA that has been the best performing ISA for investors, compared to Cash and Stocks and Shares ISAs. The appeal of the IFISA is further highlighted by the low yield returns that have been seen from Cash ISAs in recent years. The best Cash ISA listed on Moneyfacts website on 21.03.22 was a 30-month online fixed-rate Cash ISA with Skipton Building Society at 1.70% per annum.
The return is significantly lower when compared to the rates that can be achieved with an IFISA, which can be as much as 12 per cent per annum, even for a property-backed secured loan.
IFISA subscribers increase
According to ISA data from the UK government, the IFISA had over 34,000 users in 2020 and was growing annually. Since its inception, the amount subscribed has increased from £36 million in 2016 to £438 million in 2020. The average amount invested by subscription has also increased from £7,200 in 2016 to £12,882 in 2020, the largest subscription value of any ISA.
How to open an IFISA or transfer existing ISAs
In addition to the potential rates of return, what also makes the IFISA an attractive option for investors is that it is relatively easy to open and access. All you need to do is open an account with an investment platform and - providing you meet the provider’s minimum investment threshold and have demonstrated that this type of investment is appropriate for you - credit your IFISA, and then start investing.
An IFISA is also a very flexible form of investing, enabling you to easily spread your investment across different properties and developers, allowing you to diversify your investments and help spread your exposure. Lenders should always be aware of what (if any) tangible security is held to support the loan.
You can also transfer other ISAs into an IFISA, but there are rules that need to be considered when looking to do this. Firstly, if you are looking to transfer this year’s savings from a Stocks and Shares or Cash ISA, then you need to transfer the full amount. However, if you are looking to transfer from an old ISA, then you can choose how much to transfer.
If you are interested in investing in an ISA, the deadline for this tax year is 5th April 2022. By this time, you will need to have saved or invested your ISA allowance of up to £20,000 or you will lose the ISA allowance for the year. Any unused allowance doesn’t carry over into the new tax year, which starts on 6th April 2022.
*Derek Pratt is Commercial Director at Sourced Capital