The ultimate IFISA guide
Unsure about about transfers, tax and how many IFISAs you can have? Fear not, Marc Shoffman presents our comprehensive guide to IFISA investing…
PEER-TO-PEER LENDING is already well known for helping investors beat paltry savings rates and now it even has its own tax wrapper in the form of the Innovative Finance ISA (IFISA).
Most people understand how cash and stocks and shares ISAs work but as the IFISA is relatively new there is still some confusion over how the product works and how to attract customers.
So how does the IFISA work in practice and what do platforms and investors have to look out for?
Like other types of ISAs, the IFISA allows individuals to earn up to £20,000 tax free.
Most P2P lenders offer IFISAs alongside their mainstream product range but there are also providers such as Goji, and soon Orca, which let investors back loans from a range of platforms within one tax wrapper.
The IFISA is one the P2P sector’s biggest marketing tools as it can leverage mainstream awareness of the ISA family to highlight the inflation-beating returns on offer, now with the added benefit of tax-free earnings.
“The IFISA market is changing, potentially giving investors a great deal of flexibility,” says Ansar Mahmood, founder of IFISA provider Fluid Bond.
“Two of the most common factors for investors choosing a new product are return on investment, and the confidence they have in the underlying investment and IFISA provider.”
Jonathan Segal, head of fintech at law firm Fox Williams, says due diligence is important to understand what the underlying asset is and the team behind it.
“The IFISA doesn’t actually do anything special, it is just a wrapper that shields the money from tax,” says Segal.
“It doesn’t add anything to the product underneath.”
Marketing experts explain that investors want more than just a return from their IFISA.
Neil Edwards, founder of the Marketing Eye, which has helped P2P lenders such as ArchOver launch their products, said investors are looking for the optimal combination of three main factors: yield, security and liquidity.
“Having an ISA is often seen by platforms as a reason in itself for investors to join, whereas it is only a small part of the equation for most investors,” he explains.
“The IFISA makes yield more attractive, but platforms need to also play up the messaging on security, risk of loss and liquidity, particularly in an uncertain economic climate.
“Underwriting record and tangible security will provide reassurance to investors on risk.
“Liquidity will be more important than ever before as the threat of a chaotic Brexit lingers. Short-term investments, active secondary markets and early exit options will all help.”
Some P2P platforms now accept ISA transfers, meaning that investors can transfer old cash or stocks and share ISAs into an IFISA.
ISA money can be moved from old accounts from previous tax years without having to transfer the whole amount, but if you are moving funds invested in the current tax year you will have to transfer everything.
There may also be charges for exiting accounts such as a fixed-term cash ISA early.
Users need to complete an ISA transfer form with the new provider that will give details of the amount getting transferred, as well as their personal details and national insurance number.
In some cases, investors may need to print, sign and post the form back, which can delay things, but some providers such as Goji are working on ways to do this electronically.
P2P property lender Kuflink recognises that the perceived hassle of transferring funds dissuades some investors from moving old ISA money into an IFISA, so it aims to make the process as easy as possible.
“Lenders simply create a Kuflink account, fill out a transfer form online and we’ll organise it with their current provider,” a Kuflink spokesperson said.
“We do still need a physical signature from customers, but the rest of the process is entirely hands-off for investors.”
Generally speaking, cash ISA transfers should take up to 15 days and stocks and shares up to 30 days.
“It’s also important to make sure you transfer your ISA holdings directly, rather than withdraw your funds and then try to transfer them, as this could lose your tax allowances,” Stuart Law, chief executive of Assetz Capital, warns.
How to hold an IFISA
Investors can only hold one active IFISA during a single tax year.
However, they can open IFISAs with other P2P platforms just to transfer old ISA money from previous years. An investor would not be able to put any non-ISA money into these accounts though.
P2P industry commentator Theresa Burton warns this framework prevents investors from diversifying to mitigate risk.
“If the individual invests in small business lending on one platform they will not be able to invest in consumer or property loans, or even via other small business lending platforms,” she says.
“Ideally, HMRC would allow investors to diversify within the tax year.
“As it is structured now, the IFISA is encouraging single platform risk concentration which is against the general advice to diversify and for platforms with smaller volumes and narrow segmentation I am concerned about the increased risk exposure as diversifying within the platform’s portfolio will be challenging.”
She said it would be good to see more IFISA providers that let you pick and choose which platforms’ investment offerings you put into your IFISA portfolio.
There are already firms such as Goji that build portfolios that include P2P loans from different providers, selected on behalf of investors.
Orca launched a comparable offering last year and is set to launch an IFISA before the end of the tax year.
“Currently P2P platforms or investment providers offering debtbased securities offer IFISAs,” says Iain Niblock, co-founder of Orca.
“Investors are therefore restricted to investing in one product provider per tax year with new ISA money.
“We see this as a real problem in the industry as it leads to investors being tied to one product provider and results in a poorly diversified portfolio.”
Orca’s IFISA will allow individuals to invest across multiple P2P lenders within a single product.
Existing P2P loans
Technically, existing P2P loans cannot be transferred into an IFISA.
Investors are unable to transfer loan parts directly from one product to another, mainly because ISAs have to be opened with cash.
But some platforms have worked out ways to let users move their funds, either by diverting interest repayments or by selling their loans and then reinvesting the proceeds into the tax wrapper.
For example, Landbay lets investors with cash balances greater than £5,000 in their Classic P2P account transfer their money into an IFISA account.
All they have to do is request the transfer, provide their national insurance number and sign the required declarations. If their money is already invested in Landbay loans, the investor will have to first sell these loan parts through the secondary market and then request the transfer.
Similarly, Zopa investors can transfer in funds from their Core and Plus products to the Zopa ISA by changing their repayment settings so the money will be reinvested into the ISA product.
Alternatively, customers can sell their loans and that money can be transferred from their holding account into their new Zopa ISA account.
Funding Circle says investors can sell loans quickly and easily to other investors on the secondary market before withdrawing funds from their bank account and then transferring them to their ISA.
RateSetter will also let clients sell loans and then use the cash to open an IFISA.
This liquidity depends on there being enough demand for these loans on the secondary market and there may also be withdrawal charges.
While the IFISA has seen marked growth over the past year, there is still plenty of untapped potential. Hopefully as investors understand the product more, its popularity will increase and the IFISA will finally emerge as a viable alternative and complement to cash and stocks and shares ISAs.
This article featured in the March issue of Peer2Peer Finance News, now available to read online.