Few savers have heard of an IFISA – an Innovative Finance ISA – that offers tax breaks for investing in peer-to-peer finance.
IFISAs were introduced by former Chancellor George Osborne in his Budget 2014 and seem to have kept a low profile since then.
He wanted to encourage more people with spare cash to use the money to businesses and individuals another option to borrow other than from a bank.
Many peer to peer lenders offer IFISAs, but if you do not know about them, most do not tell you about the tax saving option.
How much can I invest in an IFISA?
The rules are the same as cash or stocks and shares ISAs.
The 2016 savings limit is £15,240, rising to £20,000 from April 6, 2017.
What is the benefit of an IFISA?
Any income paid as interest on loans is wrapped in the ISA and remains tax-free. Money paid into an ISA is not taxed and any cash taken out is tax-free as well.
What can an IFISA invest in?
The main investment is peer-to-peer lending (P2P). Investors stake an amount of cash with an online platform that matches lenders with borrowers.
As the companies operating as platform benefit from cheaper costs by running their businesses online, returns are higher.
What are the risks?
The ISA comes with little risk – the tax wrapper is a government backed way to invest.
However, lending money online is risky, which is why the return is often between 5% and 7%, compared with the meagre returns from high street banks and building societies.
P2P lending is a relatively new concept and the market has yet to bed in long enough for investors to assess failure rates.
Many P2P lenders have funds designed to cover bad debts, but P2P is not covered by the Financial Services Compensation Scheme.
Investors could lose all their cash and have no recourse to compensation, leaving action through the courts as the only way to recover their money.
Can expats invest in an IFISA?
Expat tax residence determines if an IFISA is worthwhile.
Expats remaining UK tax resident while on assignment abroad still pick up ISA tax breaks, but non-residents do not.
The same tax residence rules apply to ordinary ISAs and pensions.
