Sarah Laing outlines a new type of individual savings account for investors.
From 6 April 2016, a new type of Individual Savings Account (ISA) – the Innovative Finance ISA (IFISA) – will be launched.
IFISAs will be able to hold peer-to-peer (P2P) loans, which often pay significantly higher returns than cash accounts. Broadly, P2P lenders act as middlemen by matching people who wish to invest cash with those who want to borrow money. From 6 April 2016, interest and gains from P2P loans will qualify for tax advantages where these loans are made through an IFISA.
Current position
Currently, two types of ISA are available to investors - cash ISAs, and stocks and shares ISAs. Broadly, cash ISAs are available to investors aged 16 and over, who are resident in the UK; to hold a stocks and shares ISA, the investor must be aged 18 or over and resident in the UK. The maximum investment limit is £15,240 for 2015-16 and it is expected that this limit will remain unchanged for 2016-17.
The management of ISAs is governed by regulations (the ‘ISA Regulations’ (SI 1998/1870)), which specify various investments that can qualify for the favourable tax treatment offered by each type of account. Peer-to-peer loans are currently not eligible for either type of ISA, other than where they are included within an investment trust or similar product that is eligible to be held within the wrapper of a stocks and shares ISA. The ISA Regulations also set out which financial institutions can offer ISAs, and specify the information that ISA providers must supply to HMRC. These regulations also specify other rules and features of ISA, including those concerning the ownership, transfer and withdrawal of ISA investments.
That’s ‘innovative’!
The ISA Regulations will be amended by secondary legislation to establish a third ISA type – the Innovative Finance ISA. This account will be available to investors aged 18 or over. Along with loan repayments, interest and gains from P2P loans will be eligible to be held within this new type of ISA, without being subject to tax.
P2P lending platforms with full regulatory permissions from the Financial Conduct Authority (FCA) will be eligible to offer the IFISA in accordance with the ISA Regulations. Like other ISA providers, these platforms will be required to supply HMRC with certain information about the accounts they provide. Various account requirements set out in the ISA Regulations will be updated or modified to accommodate the IFISA.
As a result of these changes, an ISA investor will be entitled to subscribe new money each year to a maximum of one IFISA, one cash ISA and one stocks and shares ISA. The amount of new money paid into all of the ISAs held by an investor must not exceed the overall ISA subscription limit for the year.
So, from 6 April 2016, lenders will be able to set up an IFISA with individual platforms. Once in place, investors can allocate a capital balance on their P2P loans up to the ISA allowance threshold to this account each year, and enjoy tax-free returns on the interest paid by borrowers on this amount.
Practical Tip:
Money held with P2P lenders does not fall under the Financial Services Compensation Scheme (FSCS), which protects savers if their bank or building society goes bust, so anyone considering investing in an IFISA need to bear in mind the risks.
