THE INNOVATIVE Finance ISA (IFISA) is starting to attract more attention from savers wanting to tap into the potential returns from peer-to-peer lending while protecting their profits from the taxman.
It allows you to invest all or part of your £20,000 annual ISA allowance in P2P lending to individuals or businesses, without paying income or capital gains tax on your lending interest.
With interest rates of between 4.2 per cent and seven per cent on offer from the three largest P2P platforms, the IFISA could gain traction in the coming tax year as returns from the stock market look increasingly uncertain. The IFISA market attracted £290m in the last tax year and this is expected to rise.
If you want to take advantage of the IFSA and you’ve already got savings or investments in other ISAs, there a few things you need to know about transfers.
P2P lenders have previously said that a lot of money flowing into their IFISA products has come from existing customers who already lend with them. This is partly because of a lack of awareness about one of the newer additions to the ISA stable among the British public, and financial advisers’ unwillingness to recommend them. If you have one or more existing P2P loans that you want to put in an IFISA, HMRC rules state you can’t transfer them directly, you have to sell them first and transfer the cash.
If you want to transfer a stocks and shares ISA, you have to sell your holdings first and move the cash. Cash ISA transfers are more straightforward, but it can still be a lengthy process. Zopa, for example, says from receiving an ISA transfer form, it can take 20 working days to transfer a stocks and shares ISA and 15 working days for a cash ISA. Don’t try to avoid this process by simply withdrawing the cash and paying it into a new IFISA or you will lose all the tax benefits.
Although investors must sell old P2P loans to move the proceeds into an IFISA, Zopa allows customers to direct repayments from regular accounts to an IFISA automatically by turning off the relending function.
Read more: Zopa developing IFISA transfer features
Some providers have been developing systems to speed the transfer process up – direct lending platform Goji, for example, says it will be able to facilitate electronic ISA transfers by the end of the next tax year, reducing paperwork and waiting times.
You can also transfer out if you want to move to an IFISA with a different providers.
Check with the provider you are moving from whether they allow partial transfers if you don’t want to transfer your whole pot, as not all allow this.
You’ll also need to check what fees you may be charged for transferring in or out.
You can hold more than one IFISA, but new contributions in a single tax year must all go into the same one. If you’ve got cash languishing in old ISAs, you can transfer this into the IFISA to make it work harder. You can transfer money from cash ISAs, stocks and shares ISAs and IFISAs that you contributed to in previous tax years into any number of IFISAs.
The £20,000 limit doesn’t apply here because you’re using your allowance from previous years, so you can move as much as you like. But if you want to make new contributions in a single tax year, you can only put it into one IFISA and only up to £20,000 (or spread your allowance across different types of ISA).
This tax year ends on 5 April, so be quick if you want to maximise your allowance for this year and think about where you can put your new allowance to make the most of it.
Read more: IFISAs: Plenty to play for
Look out for our latest IFISA special report in the next issue of Peer2Peer Finance News.