Innovative finance Isa market starts to grow – returns of up to 6% targeted
The innovative finance Isa (individual savings account) market has finally started to expand as two major lenders launch their first tax-free products.
LendingCrowd and Lending Works are the newest peer-to-peer firms to offer innovative finance Isas.
These products allow borrowers to lend directly to individuals and small businesses up to the yearly Isa limit - £15,240 in the 2016/17 tax year.
Stuart Lunn, CEO and co-founder of LendingCrowd, says: “We’re excited about launching the innovative finance Isa this week and see a massive opportunity for direct investors and the intermediary market to access the underlying asset class through a tax-efficient wrapper.”
However, would-be investors must remember that, unlike cash Isas, any funds invested are not covered by the Financial Services Compensation Scheme.
And, as with any investments, the value can go down as well as up – so you could lose what you’ve lent.
The history of innovative finance Isas
It has been a sluggish start for the innovative finance Isa until this point. Despite being launched in April 2016 only a handful of providers currently offer products.
These are typically smaller players such as Abundance, Crowd2Fund, and Crowdstacker.
Major brands Funding Circle, Ratesetter and Zopa are all still awaiting approval from regulator the Financial Conduct Authority before they can offer their own Isas.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.