What is an Innovative Finance ISA?

How do Innovative Finance ISAs work?

An IFISA lets you lend your money directly to individuals, businesses or property developers through peer-to-peer lending platforms. Instead of saving through a bank or investing in the stock market, you’re acting as a lender and earning interest in return.

These platforms connect lenders with borrowers and manage the loan repayments. It can be a way for investors to support specific projects they’re passionate about, or earn higher returns than they would using a traditional savings account. But like any investment, it comes with risks. We’ll cover these in more detail below.

Are Stocks and Shares ISAs different to Innovative Finance ISAs?

IFISAs and Stocks and Shares ISAs are both ways you can invest, but they work quite differently.

• Stocks and Shares ISAs - these typically invest in things like company shares (equities), funds or bonds. Returns are linked to the performance of the stock market so your investments may go up or down depending on market conditions.
• IFISAs - these involve lending money directly to borrowers, with returns coming from interest on those loans. There’s a risk that borrowers may default, and be unable to pay, and your money isn’t protected if the peer-to-peer lending platform fails.

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What kinds of investments can go in an IFISA?

The most common types of investments in an IFISA include:

• Peer-to-peer (P2P) loans – you lend money to individuals or businesses who repay you with interest.
• Property loans – your money is used to finance developments or property purchases.
• Green energy projects or business loans – some platforms specialise in sustainable or socially responsible investments.

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What are the risks associated with Innovative Finance ISAs?

IFISAs can offer higher returns than other types of ISAs, but it’s important to understand the risks before you invest. 

Unlike a Cash ISA, your money isn’t protected by the Financial Services Compensation Scheme (FSCS), so there’s a risk that you could lose some or all of your investment. 

Key risks include:

• Borrower default – if someone you’ve lent money to can’t repay their loan, you might not get your money back.
• Platform failure – if the peer-to-peer lending platform goes out of business, your investment could be at risk.
• Lack of liquidity – it can be difficult to get your money out quickly. You usually need to wait until the borrower repays the loan or find someone else to buy your investment.
  
  

Many platforms carry out due diligence on borrowers and offer features like provision funds or automatic diversification to spread your risk. However, it’s important to remember that these measures don’t guarantee your money will be protected.

Can I open an IFISA if I already have another ISA?

Yes. You can have more than one type of ISA, but you can only pay into one of each kind per tax year. So if you’ve already paid into a Stocks and Shares ISA or a Cash ISA this tax year, you can still open and use an Innovative Finance ISA provided it’s your only active IFISA that year.

You can also transfer money from other ISAs into an IFISA, which can be a smart way to consolidate your tax-free savings in one place if you’re looking to try peer-to-peer lending. As always, check with your provider first as not all of them allow transfers in or out.