How Innovative Finance ISA (IFISA) Rules Could Benefit SMEs

by | Mar 31, 2016 | Advisor Tips, Investment News

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From April 6, lenders will also have access to tax-free interest via the new Innovative Finance ISA (IFISA)

Benefits of the new Innovative Finance ISA (IFSA)

From April 6, investors will be able to hold peer-to-peer (P2P) loans within Individual Savings Accounts (ISAs). Lenders will also have access to tax-free interest via the new Innovative Finance ISA (IFISA), which will cover loans arranged through P2P platforms. The result? P2P lending will become much more fruitful for both parties involved.

Historically ISAs have only had access to very conservative yields, while institutions have had access to the higher yield products. The rationale was that retail consumers could not handle the potential downside to the riskier product set. This is grossly condescending and unfair to the retail investor who cannot access the high yields unless they can pay to play through the institutional routes. Going down that route, retails consumers would typically encounter high minimums and high fees, which has been restrictive.

Allowing AIM listed equities into the ISA was a step in the right direction in helping establish equivalence and improve access for retail investors. Alternative finance instruments, whether they be P2P loans or debt-based securities, have the same yield potential as they are investing in SMEs, which are at the heart of the British growth story. Making them eligible for Innovative Finance ISA investments is the right thing to do to allow the retail investors to access this yield.

At CODE Investing, we think that all alternative instruments should be considered to for inclusion in the Innovative Finance ISA starting with P2P loans and debt-based securities (such as mini-bonds), but also equity investments. We are not saying that an instrument should get double tax benefits, as equity investments already have SEIS and EIS benefits, but not all investors can avail of them. So a reasonable argument could be made that investors should be given the choice of which scheme they would like to invest through, either ISAs or SEIS /EIS.

It’s worth noting that retail investors and their advisors should still apply the best practises of diversification into asset, intermediary, company stage and instrument. This rule should always apply, regardless of how you choose to deploy your capital.

In summary, the changes in the structure of P2P lending are good news for the alternative finance industry. But we believe they only scratch the surface in terms of how liberated the industry could (and is set to) become. These practices should be extended to other debt investments, increasing access to revenue capital and returns for all parties.

This article was written for April’s Edition of the Business Reporter.

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