How to Invest Tax-free in Peer-to-Peer Lending with IFISAs
Peer-to-peer (P2P) lending involves lending money to people and businesses via a P2P platform (generally web-based) and being paid back with interest by the borrower.
P2P lending has become increasingly popular among savers looking for better interest rates than those offered by banks and building societies. Until quite recently, however, you couldn’t invest in them tax-free.
All that changed in April 2016, though, with the launch of the Innovative Finance ISA, or IFISA for short. IFISAs allow anyone to invest tax-free in P2P lending via authorized platforms.
You can put any amount into an IFISA up to your annual ISA allowance. In the current 2018/19 tax year this is £20,000, which can be divided however you choose between a cash ISA, a stocks and shares ISA and an IFISA. So, for example, you could invest £10,000 in a cash ISA, £6,000 in a stocks and shares ISA and £4,000 in an IFISA.
- Note that under current rules you are only allowed to invest new money in one of each type of ISA in a tax year. It is though generally possible to transfer money from one type of ISA to another without it affecting your annual entitlement (although there may be platform fees to pay).
After a slow start when only a very few were available, in 2018 the number and range of IFISAs has grown significantly. As of July 2018 over 40 UK IFISA providers are operating, ranging from well-established P2P lenders such as Zopa to new, upcoming platforms such as The Just ISA (see below). Interest rates paid vary considerably, from around 4% to 15%. Obviously, the higher rates reflect the higher levels of risk involved.
Although all IFISAs involve P2P lending, a number of different types are available. Those currently on offer include lending for all the following purposes:
- property development
- business loans
- personal loans
- green energy projects
- bonds and debentures
- entertainment industry loans
- infrastructure projects
An unusual IFISA which certainly lives up to the “Innovative” description is The Just ISA. This is described as a litigation ISA. Lenders’ money is used to help individuals fund the cost of taking businesses, institutions and individuals to court, typically for reasons of professional negligence.
The Just ISA offers five-year bonds paying a gross interest rate of 8% per year (in practice this headline rate will be reduced somewhat due to fees and charges). All cases are underwritten and fully insured, and they say they have a success rate of 90%. There is a minimum investment of £2,000.
What Are The Risks?
All UK IFISA providers have to be authorized by the Financial Conduct Authority (FCA) and HMRC. This doesn’t in itself protect lenders (or savers if you prefer) against the failure of a platform, however. While savers with UK banks and building societies are covered by the government’s Financial Services Compensation Scheme (FSCS), which guarantees to reimburse up to £85,000 of losses, this does not apply to IFISA platforms.
All IFISA providers do offer various safeguards to lenders, though. These vary, but include provision funds to cover potential losses, insurance policies, and so forth. In many cases, also, loans are made against the security of property or other assets, which in the worst case could be sold to pay off any debts.
Even so, IFISA lenders don’t enjoy the same level of protection in the UK as bank savers. This is, of course, a major reason why the returns on offer are significantly higher. It’s therefore important to be aware of the risks and ensure you are comfortable with them before investing this way. It’s also important to lend across a range of platforms and loans, and not make the mistake of putting all your savings eggs in one P2P lending basket.
Summing Up
If you are looking for a home for some of your savings that can offer better interest rates than banks and building societies and won’t incur any tax charges, IFISAs are definitely worth considering.
As well as the higher interest rates, they can add diversity to your investments, helping you ride out financial peaks and troughs. Just be aware of the risks involved in P2P lending, and ensure you invest in IFISAs only as part of a balanced portfolio.
Disclosure: this is a sponsored post on behalf of The Just ISA. All investments carry a degree of risk. Be sure to do your own “due diligence” before investing, and speak to a qualified professional financial adviser if in any doubt before proceeding.
If you have any comments or questions about this post, as always, feel free to post them below.
July 24, 2018 @ 4:54 pm
I had never even heard of IFISAs so this made for interesting reading! I’ll have to investigate this further, but it’s a good point made about how these don’t have backing by the Financial Services Compensation Scheme (FSCS) to guarantee reimbursement up to a large amount, so you need to check what safety measures are in place by the specific provider. Great sponsored post!
Caz
July 24, 2018 @ 5:14 pm
Thanks, Caz. Yes, there’s always a trade-off between risk and reward, and it’s important to do your “due diligence” before investing. But equally, with the inflation rate currently around 2.5%, if you stick with bank or building society accounts, you are quite likely to end up losing money overall.
As you say, it’s important to assess any potential IFISA investment carefully to see what the risks and safeguards are, and avoid putting all your savings into just one or two products. Unfortunately my dad (God rest his soul) made that mistake, and it didn’t work out well for him. I vowed at the time never to make that mistake myself!
July 31, 2018 @ 6:46 pm
As you rightly point out cash savings are losing money every day due to low rates and high inflation. Stocks and shares carry risk as well and aren’t covered by the FSCS either nor are the platforms if you have more than £50k/£85k invested with them even if it is spread across different funds.
P2P and IFISAs have a place in our savings. They feel riskier but the returns are much better. Spread your P2P investments across multiple platforms and this reduces the risk somewhat.
July 31, 2018 @ 8:01 pm
Thanks for your comment. Yes, absolutely. Don’t be afraid to put some of your savings into P2P/IFISAs, but spread the risk as widely as possible.