The end of the tax-year 2016-17 is looming; 70 days to be exact. UK savers have had a tough past year with savings rates being negatively impacted as a result of Brexit – Bank of England base rate dropped 25 baiss points to 0.25%. To compound the misery, cash ISAs are struggling to yield much above 1%. An alternative investment does exist, providing attractive risk-adjusted returns.The Innovative Finance ISA (IFISA) was launched in April 2016, allowing investors in peer-to-peer lending (P2P) to hold their P2P investments in a tax-efficient wrapper. This lucrative ISA product was hotly tipped to drive the alternative investment class into the mainstream - 400,000 new investors predicted by Nesta in its 2015 Alternative Finance report. However, due to a regulatory backlog in authorising peer-to-peer lenders, only a couple of platforms currently offer IFISAs (see below).The good news is, platforms are becoming fully FCA authorised and HMRC approved as ISA plan managers, meaning more IF ISAs should be entering the market, yielding rates in the region 5% or more annually.
Here is a graph displaying the returns available from 10 of the top Fixed Rate ISAs* on the market currently, compared with three Innovative Finance ISA providers.
*10 Fixed Rate ISA providers taken from 'Top ISA Rates' on 25/01/17: https://top-isa-rates.co.uk/*Peer-to-peer lending is not covered by the FSCS. Investor's capital is at risk and could be be lost without recovery.
The annual ISA allowance for 2016-17 is £15,240. It was the same the year before, but has been gradually increasing for some time.
Allowance can be spread between ISAs however the investor wishes:£10,000 to IFISA, £3,000 to Stocks & Shares and £2,240 to Cash ISA for example.
An investor cannot subscribe to another ISA of the same type in that tax year:transfer rules allow ISA plan managers who offer the IFISA to make their own decision when it comes to an investor holding multiple IFISAs in a single tax year (explained in 'Adapted IFISA rules').
some or all of the previous years' ISA subscriptions, the investments bought with those subscriptions, and any income arising on those investments (prior years account).
Because P2P lending is not a liquid asset class, an investor's investment must be sold to a new investor on the platform, thus turning the asset into cash so that it can then be transferred.
*Having consulted with the HMRC it is clear that this is a decision made between the investor and the plan manager.
*Statistics correct at time of publication - rates in per annum.
*The above P2P platforms are included in the list as Orca has been made aware of their status, other platforms may have legitimacy to be included.
At present, many of the big platform, such as Zopa, Funding Circle, RateSetter and LendInvest, operate under interim permissions and must become fully authorised by the FCA before applying to the HMRC for ISA plan manager status. Exactly when the major platforms will pass these regulatory barriers is still unknown, but it is expected that several more prominent P2P platforms will have Innovative Finance ISAs available on the market in the coming months. Landbay, for example, is expected to launch its IF ISA before the end of this tax year (2016-17).