Tax-efficient investing: Using IFISAs in property-backed P2P lending
Unnecessary taxation can erode your hard-earned investment returns, which is why 22.3m UK savers and investors chose to shelter their money in an ISA during the 2023-24 tax year1.
While the Cash ISA is best for risk-averse savers, and the Stocks & Shares ISA is favoured by traditional investors; the Innovative Finance ISA (IFISA) is arguably the best tax-efficient option for property investors and / or those seeking to diversify their investments.
What is an Innovative Finance ISA?
Launched in 2016, the IFISA was initially intended to allow investors in P2P loans and crowdfunding platforms a way of shielding their returns within a tax-free wrapper. More recently, the Innovative Finance ISA remit has been extended to include long term asset funds (LTAFs) and open-ended property funds as well.
Up to £20,000 can be invested in IFISA accounts during each financial year, and investors can hold multiple Innovative Finance ISAs simultaneously. Unlike Cash ISAs, IFISAs are not covered by the Financial Services Compensation Scheme (FSCS) and it is important to note that capital may be at risk in the event of a borrower default. However, good Innovative Finance ISA managers will ensure that they have strong risk management policies in place to minimise the risk of default. For example, Loanpad takes property as collateral on every loan, with an average LTV of 45.47%.
All ISAs share one big advantage: returns are completely tax-free. Interest earned within an IFISA is not subject to income tax, and any capital gains are also shielded from HMRC.
For example, if you invest £10,000 in a property-backed Innovative Finance ISA paying 6% in annual returns, you would earn £600 in interest each year, and you can keep every penny of these earnings without any tax deductions. If this interest is reinvested, you can also benefit from the effects of compound interest, which can help you to build wealth more quickly.
Loanpad offers two ISA-eligible accounts, the ISA Classic and the ISA Premium. These accounts are currently targeting returns of 5% and 6%, respectively. The ISA Classic allows for daily access so that investors can make withdrawals when needed. The ISA Premium account requires 60 days’ notice before any withdrawals are made subject to liquidity.
How to use the IFISA in property-backed lending
Loanpad’s Innovative Finance ISA accounts allow investors to back British properties and earn interest on property-backed loans. Every loan is secured against physical property which can be sold in the event of a borrower default, thereby providing an additional layer of security for investors.
This is one of the most direct ways to access diversified property market returns. Each investment is spread across a number of property loans, which reduces the risks associated with a default and offers exposure to different properties in a variety of neighbourhoods.
To access the benefits of property-backed ISAs, simply choose a regulated P2P property lending platform such as Loanpad, open a new account, deposit your funds and start investing.
All new investors must complete an appropriateness test to ensure that they are aware of the risks involved in P2P lending. While past performance is no indication of future success, Loanpad has maintained a zero-capital default record to date due to the platform’s risk-averse strategy and strong underwriting due diligence.
Get in touch with us today to learn more about Loanpad’s Innovative Finance ISA and how property-backed loans work.
| Don’t invest unless you’re prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2 mins to learn more. |
