It is almost a year since the Innovative Finance ISA was extended to include debt-based crowdfunding, yet the majority of investors are still paying tax on returns when they don’t need to, as Julia Groves, partner and head of crowd bond platform Downing Crowd explains…
With the birth of the Lifetime ISA (LISA) for 18-39-year-olds on 6 April 2017, the Innovative Finance ISA (IFISA) is no longer the baby of the ISA family. But it is perhaps still the least well understood.
The IFISA allows access to alternative finance returns in the form of both P2P loans or debt-based securities, for example crowd bonds. Because these types of investments involve more risk, they offer the potential for significantly higher returns – typically between three per cent to seven per cent per year over a short to medium term – than currently available through cash ISAs.
Provided you are happy to take on the higher risk that comes with investing in P2P loans and crowd bonds, the IFISA could therefore prove an attractive option. And since they are generally illiquid and held for a fixed term they are not exposed to the short-term volatility that comes with investing through a stocks and shares ISA.
Finding new and diversified investment opportunities to enhance the tax efficiency of your investment portfolio has become more of a challenge following the recent changes to pension legislation and further restrictions on Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) qualifying investments. As a result, high earners should make sure they maximise the tax wrappers available to them.
Is the typical 0.5 per cent return on savings the best use of your ISA wrapper? Or are you better paying tax on that and protecting a potential five per cent or six per cent annual return from your lending?
Some of the terminology surrounding the IFISA and its associated investments can be confusing, but the first thing to be clear on is that an IFISA can only hold P2P loans and debt-based investments. Not any equity investments.
Whilst P2P lending is typically more diversified, with the platforms mostly picking the loans for you, debt-based investments – more simply known as crowd bonds – tend to focus on a smaller number of larger investment opportunities.
Although these carry single investment risk, they should allow the platform to take a more thorough approach to due diligence. The offer document for each opportunity outlines all the information an investor should need to understand the offer, the risks and fees involved and the due diligence undertaken. It should be an open and transparent process that should suit investors who want transparency and control.
The annual ISA allowance is now £20,000 and there is no limitation on transfers of your existing ISAs from previous years, so for those looking to broaden the diversification of ISA portfolios and invest in assets uncorrelated to the stock market, the IFISA is surely worth a look if investors understand the risks involved and are happy to take them.
Since we launched our first bond in March 2016, we have raised more than £33m across 16 bonds to support smaller UK businesses across a variety of sectors. In doing so, we have offered members a 5.7 per cent per year weighted average interest rate, as at 16 October 2017.
If you would like more information on Downing Crowd, our crowd bonds or the Downing IFISA, please visit our website at www.downingcrowd.co.uk.
Crowd bond disclaimer – capital is at risk and returns are not guaranteed. Past performance is not an indicator of future performance. Any personal opinions expressed are subject to change and should not be interpreted as investment advice or a recommendation.