ISAs allow UK resident savers or investors to earn interest or returns on their investments tax free. The ISA allowance for the tax year 2020/2021 is set at £20,000 and you can choose from a range of types of ISAs from Cash ISAs and Stocks and Shares ISAs to ISAs for specific groups of people such as the Lifetime ISA, designed to help those under 40 to save up for their first property or a pension.
ISA allowances need to be used in any one tax year by 5th April, there are restrictions on how many ISAs of any one type you can open in any one tax year and you need to ensure you don’t exceed your £20,000 allowance across the various types of ISAs you have.
What is an Innovative Finance ISA?
Relative new kids to the block, Innovative Finance ISAs were created in 2016 to cover the growing crowd funding, bond platform and peer to peer lending markets. All investment platforms wishing to offer an Innovative Finance ISA have to be authorised by the Financial Conduct Authority and there has been a steady uptake ever since with approximately 36,000 opened in 2018 (whatinvestment.co.uk). They effectively offer tax free wrappers for peer to peer lending investments and investors are using them to diversify their portfolio and spread their ISA allowance across different asset classes.
If it’s not a tax free investment opportunity you have considered to date, here are some of the pros and cons of the Innovative Finance ISA compared to other types of ISA:
Pros of investing in an Innovative Finance ISA
At a time when cash ISAs are showing returns of less than 1%, Innovative Finance ISAs have been predicted to yield anything from 3-12% (whatinvestment.co.uk) and consequently offer potential tax free income that is impossible to achieve in conventional savings ISAs.
Whilst Stocks and Shares ISAs can also provide higher yields, the direct lending that constitutes investment in an Innovative Finance ISA is generally thought to sit between Cash ISAs and Stocks and Shares ISAs in terms of risk profile and can therefore enables diversification across different asset classes.
Innovative Finance ISAs are relatively easy to open up and invest in. You will need to open an account with the investment platform and then credit your Innovative ISA account to start investing.
Allowing you access to one of the largest growing asset classes, an Innovative Finance ISA allows you to invest in a broader range of assets, such as property, that are currently seeing rapid growth.
Innovative Finance ISAs can also provide you with the opportunity to invest your money in ethical, green or social impact investing and because your investment is within a peer to peer environment, you can often pick and choose what you would like to support. As thisismoney.com says: “IFISAs … come in all shapes and sizes, lending money for individuals, small businesses, property developments, historical refurbishments, or even renewable energy projects in sub-Saharan Africa”.
Cons of investing in an Innovative Finance ISA
The Housemartin Innovative Finance ISA is accessible in three easy steps and allows you to invest in a range of property including social impact housing projects with charities such as United Response and NACRO:
- Register on the Housemartin platform here. You will be asked to take part in a short quiz to ensure you understand the risk profile of the investments on the exchange.
- Once you have been accepted onto the platform, you can transfer money into your ISA wrapper or transfer in money from an existing ISA with another provider.
- You are now ready to invest! Choose from a range of properties with yields from 5% to 9%. You can invest as much or little as you want in ‘slices’ of each property and earn income every month as tenants pay their rent.