When most people think of ISAs, they picture Cash ISAs or Stocks and Shares ISAs. But there’s a lesser-known option that blends investing with lending—and it could offer higher returns if you’re comfortable with a bit more risk. Enter the Innovative Finance ISA, or IFISA.
What Exactly Is an IFISA?
An Innovative Finance ISA allows you to invest your annual ISA allowance (currently £20,000) into peer-to-peer (P2P) lending or debt-based crowdfunding—and earn interest tax-free. Instead of saving money in a bank or investing in the stock market, you’re lending directly to individuals, businesses, or property developers via online platforms.
How Does It Work?
You choose an FCA-regulated IFISA provider, deposit funds, and select lending opportunities. These might include:
- Personal loans
- Business loans
- Property development finance
- Green energy projects
In return, you receive interest payments—typically higher than those from Cash ISAs. But remember: returns aren’t guaranteed, and your capital is at risk.
Pros and Cons of an IFISA
| Pros | Cons |
|---|---|
| Tax-free interest | Higher risk than Cash ISAs |
| Potential for higher returns | Not covered by the FSCS |
| Diversification beyond stocks and cash | Illiquidity—your money may be tied up for years |
| Direct impact—fund real-world projects | Platform risk if the provider fails |
Is It Safe?
Unlike Cash ISAs, IFISAs are not protected by the Financial Services Compensation Scheme (FSCS). That means if a borrower defaults or the platform collapses, you could lose money. However, many platforms have reserve funds or risk mitigation strategies in place.
Who Is an IFISA For?
An IFISA might suit you if:
- You’re comfortable taking on more risk for potentially higher returns
- You want to diversify your ISA portfolio
- You’re interested in supporting UK businesses or property projects
It’s not ideal if you need quick access to your money or prefer guaranteed returns.
How to Get Started
- Compare IFISA providers—look at fees, minimum investments, and track records.
- Choose a platform regulated by the FCA.
- Open an IFISA account and transfer funds (you can transfer from other ISAs too).
- Select your investments or let the platform auto-diversify for you.
Final Thought:
The Innovative Finance ISA is a powerful tool for those seeking tax-free returns outside the mainstream. But like any investment, it pays to do your homework
