An innovative Finance ISA is a type of ISA that adds a tax-free wrapper to savings income from peer-to-peer lending. This guidance provides information on which peer-to-peer loans, crowdfunding debentures and cash investments qualify for innovative finance ISAs.
Innovative finance ISAs can only be offered if you’re approved by HMRC as an ISA manager. They are only available to investors who are 18 or over.
Transfer or withdrawal rights in relation to non-cash investments in an innovative finance ISA are only available as set out in the terms and conditions of the account.
Eligible peer-to-peer loans are facilitated by an operator authorised under section 31(1)(a) or (c) of, or Schedule 5 to, the Financial Services and Markets Act 2000.
The operator must have permission, other than interim permission under Chapter 4 of Part 8 of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2013 to carry on one or more of the activities specified in Articles 36H (operating an electronic system in relation to lending) and 39G (debt administration).
If a borrower defaults and the loan is assigned or replaced in exchange for a payment to the lender, the payment will not be made under an Article 36H agreement, but will be eligible to remain in the ISA wrapper as long as the loan was an Article 36H agreement when the lender entered into it.
All loans must be made using cash held by the ISA manager and must be entered into for genuine commercial terms and not as part of a scheme or arrangement the main, or one of the main purposes of which is the avoidance of tax.
Peer-to-peer loans held outside of the ISA wrapper cannot be sold, and re-purchased inside an innovative finance ISA except when the loans are sold and are made available for purchase (using cash held by the ISA manager), at the same price, by any lender in the open market. That is, the loans must be available for purchase by more than one prospective purchaser.
It will not usually be open to a platform to purchase a lender’s portfolio of loans and for the proceeds to be used to reacquire the same loans inside the ISA wrapper. Any purchase would need to be of loans made openly available to any prospective lender.
Crowdfunding debentures are provided for in the Individual Savings Account (Amendment No. 3) Regulations 2016 which extends the range of investments that can be held in an innovative finance ISA, these are:
Eligible crowdfunding debentures must:
The ISA investor must be treated as the client of the person operating the crowdfunding platform, or a person acting on behalf of the platform. This arrangement offers the investor FCA regulatory protections and recourse to the Financial Ombudsman.
The platform (or the person acting on their behalf) must receive payments, make payments and exercise (or facilitate the exercise of) rights under or in respect of the debentures.
Qualifying debentures must be invested in within an innovative finance ISA and using cash subscriptions held by the ISA manager. They must be entered into for genuine commercial terms and not as part of a scheme or arrangement, the main or one of the main purposes of which is the avoidance of tax.
Within the meaning given in section 170 of ITA 2007, the investor must not be connected with the issuer of the debenture. The investment must not be connected to any other investment held outside the ISA wrapper. Investments made available to an investor solely by reason of their employment or position within an issuing company or charity are excluded from eligibility as a qualifying debt security.
An investor’s cash subscription and any other cash held in an innovative finance ISA (for example, loan repayments and other payments when loans default) must be held in sterling and must be deposited in:
In practice, managers can operate a single account, which may also hold other savings products, such as cash ISA, feeder fund and current account balances, as long as:
Provisional HMRC Figures from 2019/20 ISA Tax Year