Originally launched back in April 2016 the Innovative Finance ISA at first offered the opportunity to invest in peer-to-peer (P2P) lending. The remit has now been extended to include crowd bonds.
Neither loans nor crowd bonds are covered by FSCS deposit protection (these are investments not savings) so they cannot go in a cash ISA. Equally they’re not listed so can’t be held in a stocks and shares ISA. So, a new Innovative Finance ISA was created.
It’s the potential returns that really set the IF ISA apart – typically 4-6% for those savers and investors happy to take some risk, compared to the meagre 0.5% offered by many cash ISAs.
If you think crowdfunding and P2P lending are all about high-risk start-up firms, you’d be wrong. Crowd bonds are a type of crowdfunding debt but unlike both P2P lending and mini-bonds (other types of crowdfunding debt), crowd bonds allow investors to lend to UK businesses via bonds secured against the firm’s operational assets, arguably making them lower risk than unsecured loans.
Only bonds and loans are allowed in the IFISA – equity crowdfunding, while fully regulated by the FCA, is not eligible for the IF ISA – businesses here are much earlier stage and are normally not in a position to pay returns immediately much less offer security.
So why choose the IF ISA to invest in crowd bonds?
Crowd bonds look set to become a popular addition to the IF ISA, as many investors seek to further diversify their portfolios, thanks to the rise in the annual ISA allowance from £15k to £20k. Instead of just taking home 4-4.5% from 6% gross earnings, the tax-efficient wrapper will also allow crowd bond investors to keep everything with no income tax payable on the interest earned (above the £1,000 personal savings allowance) – an attractive prospect in the current low interest-rate world.
It’s true that a lack of understanding amongst investors often sees different types of crowdfunding lumped together as being too risky. But crowd bonds are actually a very simple form of lending that is, in many ways, less complex and risky than stocks and shares, particularly when you consider the amount that events such as Brexit have wiped off markets recently.
Provided that investors are fully aware of the relevant risks involved then this extension of the IF ISA could create some very exciting opportunities for UK investors.
Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest.