The previous article explained why liquidity for platforms is just as important as liquid is for fish. Below we examine the advantages of the Innovative Finance ISA, and next we’ll review what the P2P trade body does, and how it safeguards the interests of customers.
Way back when, ISA (and, before even that, PEP) season culminated each April with a frantic rush to stuff applications into envelopes. In the larger cities, eager investors would rush to dropping-off points, to which spotty-faced gophers from financial services firms would drive round, picking up the contents once the clock had struck midnight. A bit like Cinderella, but without the Prince Charming.
Then the internet happened and everything … stayed pretty much the same, apart from the envelope and box-stuffing, plus hard-pressed gophers had one less job to do. Time and technology move on, but there’s still the last-minute rush to squirrel away savings before the tax man gets a handle on them.
This isn’t an entreatment to save diligently throughout the year. We find that those who have taken advantage of the Innovative Finance ISA (IFISA), introduced by Chancellor George Osborne (remember him?) don’t need to be cajoled. But we do think it’s worth explaining its benefits, as a tax-efficient wrapper for an – as it says on the tin – innovative form of investment.
In 2016, the government launched the IFISA alongside the existing standard stocks and shares / cash ISA - showing its confidence in the burgeoning alternative finance sector - to encourage investment in business and property through the peer-to-peer lending industry, as it was fast becoming a strategic sector for the UK.
To date, more than £1bn has been invested in IFISAs, with over £500m through IFISAs run by members of the P2P Finance Association - of which CrowdProperty is proud to be one.
Not only do we see a constant stream of new money coming in throughout the year, with rates above inflation, people are also transferring in existing ISA accounts to our IFISA. You can transfer existing ISAs without using the current year’s ISA allowance limit or incurring additional tax liabilities by following a quick and simple process – of which, more details here.
There are good reasons why you might wish to consider taking advantage of the IFISA in this way, not least when you compare the yields of CrowdProperty loans to those of comparable assets. For example, the current yield on the iShares Corporate Bond Index Fund – a proxy here for UK corporate bond rates – is a stingy 2.27%1. With the August 2019 inflation rate running at 2.1%, that leaves you with less than one-fifth of a percentage point. Don’t spend it all in one shop.
While corporate bonds and CrowdProperty loans are both fixed income assets – meaning they deliver a given level of interest – it may be more meaningful to compare like with like, so let’s look at property. It’s most likely, if you’re investing in property, you have done so through buy to let. Yields here vary greatly, but from April 2020 all mortgage tax relief for landlords will be abolished, courtesy of former Chancellor Osborne again – the Lord giveth... This will see the tax bill of some landlords more than double, potentially destroying all positive cashflow. If, on the other hand, you’re investing in property via the fund route, the big managed funds invest largely in commercial property: here, underlying commercial yields top out at little more than 6%, according to Savills – and go much lower2.
So, up to 8% with CrowdProperty compared to other fixed income assets looks pretty attractive. Once it’s wrapped up in an IFISA, it looks even more so - as 8% turns into 13.3%, the equivalent outside the tax wrapper for higher-rate taxpayers. What’s more, the assets that underpin those attractive yields are themselves protected by first charge security.
If you already lend through CrowdProperty, but don’t do so via our IFISA, have a look at it, as its tax benefits could really work for you. And don’t forget, it’s possible to transfer in your existing ISA funds too.