IFISAs are the next stop for investors looking for a tax break after maxing out their pension and Seed Enterprise Investment Scheme opportunities.
The investment hierarchy for many starts with a pension, then drops to SEIS, while an Innovative Finance ISA covers the next level of tax benefits.
An IFISA is a way of investing tax-free in peer-to-peer lending. Money going in is already tax paid, while fund growth and withdrawing cash is tax-free.
Expect a return of around 5% a year from a well-managed P2P fund, while the headline rates are between 3.8% and 9.8% for the 2019-20 tax year.
The returns are attractive for investors and savers who have already used their £1,000 personal savings allowance for the year and are still looking for tax breaks – and they are worth thinking about for additional rate (45%) taxpayers who have no personal saving allowance but still want to earn interest on their cash.
How IFISAs work
Not every investor can stake cash in an IFISA. The rules demand lenders quiz investors about their net worth and attitudes to risk before allowing them to put any money in to an IFISA.
Some P2P providers will let investors transfer in funds from another ISA without impacting on the annual saving allowance.
Closing the account and opening another is not classed as a transfer and counts towards the annual allowance. Transfers must be carried out between fund managers to remain exempt from the annual saving limit.
The current maximum that can be saved into an IFISA each year is £20,000, but the IFISA does not have to take the whole amount.
For example, an investor can put £8,000 in to an IFISA and divide the rest among cash or stocks and shares ISAs.
The rules do limit investors to holding one IFISA a year.
Many P2P lenders offer IFISAs – around 70 are listed with City regulator the Financial Conduct Authority.
Investments go into a fund and make up loans to the provider’s customers. The money is split across several loans to minimise defaults and other repayment problems.
Borrowers are screened by the provider – all the investor does is put money into an account and collect the interest.