As an investor, it is important to think whether an Innovative Finance ISA is the right product to achieve your financial goals. For example, if your goal is to save money with a little risk, you will be better off with a Cash ISA. However, if you want to build up a retirement fund, then the best option would be a Lifetime ISA. On the contrary, if you are willing to take a small amount of risk and want to survive inflation without committing to a long term contract, then Innovative Finance ISA might be right for you.
Innovative Finance ISAs provide you with the opportunity to diversify your investment portfolio. IFISAs are not only an alternative to traditional assets, but your money can also be diversified across different loans, adding security to your funds. It would help if you took your time to consider what you want to accomplish from your investments and then decide whether an IFISA can deliver it. Keep in mind that you must consider all the risks involved before making a final decision.
Will you need a tax shelter for an IFISA?
First, you have to establish whether investing in an Innovative Finance ISA is right in your situation. It is essential to remember that as a taxpayer, you can access the Personal Savings Allowance (PSA), which allows you to earn tax-free interest, including the interest you earn from peer to peer lending.
The personal allowances are:
- For basic rate taxpayers (20%): £1,000
- For high rate taxpayers (40%): £500
- For additional rate taxpayers (45%): £0
This means that you should only open an IFISA account if you can earn more interest from your peer to peer investment than your PSA covers. For example, if a basic rate taxpayer with personal savings of £1,000 invests in peer to peer at a 5% per annum rate; they would be able to use £20,000 before exceeding their allowance. On the other hand, somebody who is a high rate taxpayer would only be able to invest £10,000 before they have to pay tax.
Note: This example doesn’t consider interest from other sources
Hence, the necessity of opening an IFISA account depends on your tax rate, the amount you will invest, and the return rate you will get. If your earned interest exceeds your PSA, then you should consider opening an Innovative Finance ISA with one of the IFISA providers.
If you are considering investing in p2p lending, it is worth remembering that an innovative ISA does offer some advantages, even if you do not need tax shelter immediately.
How can you open an IFISA account?
Opening an Innovative Finance ISA account is not a difficult procedure. There are three simple steps that you have to do before making payment into your account.
- Check if you are eligible: the rule is that any UK tax paying residents of age 18 or over can open an IFISA account. The IFISA provider you apply through will probably need you to submit your National Insurance number for verification of residency.
- Select an Innovative Finance ISA and apply: if you are eligible, you need to select a provider. There are a lot of Innovative Finance ISA providers available in the market. Keep in mind that you can subscribe to only one IFISA account every tax year. IFISAs are only offered by FCA regulated peer to peer lending firms like Kuflink.
- Start investing in your Innovative Finance ISA account. Once you have applied to an Innovative Finance ISA, you can start paying into your new IFISA account to the limit of £20,000 every tax year. Just remember, this limit is for all of your ISA accounts, including cash ISA, stocks & share ISA, and even lifetime ISA.
How can you withdraw money from IFISA and close the account?
The majority of peer to peer platforms allow you to withdraw funds freely from your Innovative Finance ISA, as long as it is held in cash and is not allocated to any loan or lending offer. Most Innovative ISA providers have a secondary market that allows investors to sell loans. This option can give you the choice of accessing your cash before the loan term ends. However, you may have to pay a fee depending on the platform. Remember, if you take out all funds from IFISA, you can’t replace the money again in the same tax year, and you will lose all the tax benefits on your funds. If you close your IFISA account, you can withdraw all your money or transfer it to another ISA.
Is it possible to cancel the Innovative Finance ISA?
It is worth knowing that you have a statutory right to cancel the account, which allows a fourteen-day‘cooling-off’ period. In this period, you can cancel your IFISA account. This is required by the Financial Conduct Authority and is written into the terms and conditions of your Innovative Finance ISA.