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What is an Innovative Finance ISA

Posted 4 months ago

What is an Innovative Finance ISA
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An Innovative Finance ISA (IFISA) is a type of individual savings account that allows investors to earn tax-free returns on their investments by participating in innovative finance opportunities.

Unlike traditional cash ISAs or stocks and shares ISAs, an Innovative Finance ISA focuses on peer-to-peer lending and bond/debenture investment opportunities. This means investors have the potential to earn higher interest rates compared to traditional investment options.

The Innovative Finance ISA was introduced by the UK government in 2016 to promote peer-to-peer lending and provide investors with an alternative and potentially more lucrative investment avenue. By investing through an IFISA, individuals can support businesses and individuals in need of financing, while potentially earning tax-free returns on their investments.

Whether you're a seasoned investor or new to the financial world, an Innovative Finance ISA presents an attractive opportunity to diversify your investment portfolio and potentially increase your earnings in a tax-efficient manner.

Key Takeaways:

  • An Innovative Finance ISA offers tax-free returns on investments in innovative finance opportunities.
  • IFISAs focus on peer-to-peer lending and bond/debenture investment opportunities.
  • Investing in an Innovative Finance ISA can potentially earn higher interest rates, albeit this comes with higher risk.
  • The IFISA was introduced by the UK government in 2016 to promote peer-to-peer lending.
  • An IFISA allows individuals to support businesses and individuals in need of financing while potentially maximizing their own returns.

Understanding ISAs in the UK

When it comes to saving and investing in the United Kingdom, Individual Savings Accounts (ISAs) play a vital role. ISAs offer a tax-efficient way for individuals to grow their wealth and achieve their financial goals. In this section, we will explore the different types of ISAs available, the role of ISA providers, the regulations set forth by the Financial Conduct Authority (FCA), and the key considerations when transferring funds between different ISA providers.

Types of ISAs:

There are several types of ISAs that cater to different financial needs. One common type is the Cash ISA, where individuals can deposit and earn interest on their savings tax-free. This provides an opportunity to accumulate funds over time without the burden of taxation.

Another type is the Stocks and Shares ISA, which allows individuals to invest in a wide range of assets such as stocks, bonds, and mutual funds. This provides the potential for higher returns, although it is important to bear in mind that investments carry risks.

And there is Innovative Finance ISAs, which enable peer-to-peer lending and direct investment opportunities. This form of ISA allows individuals to invest in loans and other debt-based securities, potentially earning higher interest rates.

Role of ISA Providers:

ISA providers play a crucial role in facilitating the opening and management of ISAs. These providers, which include banks, building societies, and investment firms, offer a variety of ISA products tailored to different financial goals and risk tolerances.

Being an ISA provider requires authorization from the Financial Conduct Authority (FCA), which ensures that providers meet certain standards and regulations to protect the interests of investors. It is important to choose an ISA provider that is reputable and regulated by the FCA to safeguard your investments.

Benefits of an Innovative Finance ISA

An Innovative Finance ISA offers a range of advantages for investors, making it an attractive option for those seeking higher returns on their investments. Let's explore the key benefits of opening an Innovative Finance ISA.

Tax-Free Returns

One of the main advantages of an Innovative Finance ISA is that it can provide tax-free returns on your investment, within your annual £20,000 ISA allowance. This means that any interest you earn within the ISA are not subject to income tax or capital gains tax.

Potentially Higher Interest Rates

Compared to traditional savings accounts, Innovative Finance ISAs often offer potentially higher interest rates. This is because these ISAs provide opportunities to invest in innovative finance options, such as peer-to-peer lending and bond/debenture investments, which can generate higher returns compared to traditional methods, however it may come with increased risk.

Tax Treatment

Innovative Finance ISAs have their own specific tax treatment. Unlike other ISAs, such as cash ISAs or stocks and shares ISAs, the tax treatment of an Innovative Finance ISA depends on the investments held within the ISA. It's important to consult with a financial advisor or tax professional to understand the specific tax implications based on your investment portfolio.

By opening an Innovative Finance ISA, you can take advantage of tax-free returns, potentially higher interest rates, and the unique tax treatment offered by these ISAs. Consider exploring the innovative finance options available through these ISAs to maximize your returns and diversify your investment portfolio. However, it's essential to carefully assess the risks associated with innovative finance investments and ensure they align with your financial goals and risk tolerance.

Investment Options within an Innovative Finance ISA

When it comes to investing within an Innovative Finance ISA, there are a range of options available to suit different investment strategies and risk appetites. Two common investment options within an IFISA are loan-based securities and asset-backed securities.

1. Loan-Based Securities

Loan-based securities are investments that involve lending money to individuals or businesses in return for interest payments. This type of investment can provide a fixed income stream over a predefined period. However, it's essential to consider the creditworthiness of the borrowers and the risk of default. Some IFISA providers offer platforms that allow investors to choose specific loans to fund, providing a more hands-on approach to lending.

2. Asset-Backed Securities

Asset-backed securities are investments that are backed by a pool of physical assets, such as property or equipment. These investments provide potential returns through rental income, capital appreciation, or a combination of both. Asset-backed securities diversify investment portfolios and may offer a degree of stability due to the underlying tangible assets. However, it's important to assess the performance and valuation of the assets to make informed investment decisions.

It's worth noting that different IFISA providers may offer additional investment options or variations of the above securities, so it's crucial to research and compare the offerings before making your investment decisions.

Important Legal Information:

Please note that investing in an Innovative Finance ISA carries risks, including the potential loss of capital. The value of investments can fluctuate, and returns are not guaranteed. It's important to carefully review the terms and conditions of the chosen IFISA provider and seek professional financial advice to assess if investing in an IFISA is suitable for your individual financial circumstances.

By considering the available investment options within an Innovative Finance ISA and understanding the associated legal information, investors can make well-informed decisions to build a diversified and potentially rewarding investment portfolio.

Transferring funds to an Innovative Finance ISA

If you're looking to make the most of your money and explore the potential opportunities offered by an Innovative Finance ISA, transferring funds from an  ISA to an IFISA can be a smart move. This process allows you to diversify your investments and potentially earn higher returns.

Transferring funds between different ISA providers is a common practice that allows individuals to switch to providers offering better interest rates, improved customer service, or a broader range of investment options. Known as ISA transfers, this process enables individuals To make investments which are not considered part of their £20,000 per annum ISA allowance.

Moving money from one ISA to another is a straightforward process, but it is important to follow the specific guidelines set by the providers involved. Typically, you will need to complete an ISA transfer form/pack provided by your new provider, who will handle the transfer process on your behalf.

In conclusion, understanding the various types of ISAs, the role of ISA providers, and the regulations set by the Financial Conduct Authority is vital when it comes to making informed decisions about saving and investing in the UK. Additionally, being aware of the process for transferring funds between ISA providers can help individuals optimize their investments while maximizing their tax advantages.

Evaluating Risk and Seizing Investment Opportunities

The key to successful investing lies in evaluating risk and seizing the right investment opportunities. Assess the potential risks associated with each investment option within the Innovative Finance ISA, and consider factors such as the borrower's creditworthiness, collateral, and the platform's track record.

Additionally, stay up-to-date with market trends, economic indicators, and regulatory changes. This will enable you to make informed investment decisions and identify potentially lucrative opportunities that align with your financial goals.


An Innovative Finance ISA (IFISA) is a tax-efficient investment option that provides investors with the opportunity to access innovative finance opportunities such as peer-to-peer lending and bond/debenture investment. By opening an IFISA, individuals can benefit from tax-free returns and potentially higher interest rates, making it an attractive choice for those looking to grow their wealth.

Throughout this article, we explored the different types of ISAs available in the UK and the key considerations when transferring funds between providers. We also examined the concept of innovative finance, its associated investment opportunities, and the risks involved, ensuring you have a comprehensive understanding of this investment option.

In conclusion, an Innovative Finance ISA can be a valuable addition to your investment portfolio, providing tax advantages and the potential for higher returns. However, it is important to carefully consider the risks and make informed decisions to ensure the best possible outcomes for your financial future.

Remember, the above is not advice, just a guide and a few tips on what to look for. It’s always good to get professional advice and carry out thorough due diligence as your capital is at risk before investing. 

Author: Nikki Dale

Disclaimer: To the best of our knowledge, the information we have provided is correct at the time of publishing. We recommend that you seek professional advice on any topic discussed. NextCrowd is not liable for any damages arising from the use of or inability to use this site or any material contained in it, or from any action taken as a result of using the site.

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