Innovative Finance ISA

Explore Innovative Finance ISA (IFISAs), a modern investment tool for diverse investors. This guide will cover IFISAs, their functioning and the eligibility criteria. Discover how to invest in peer-to-peer lending, earn competitive returns, and diversify your investment portfolio while enjoying tax-free interest and gains. Learn how to maximise your annual allowance of £20,000 and make informed decisions about your financial future.

What is an Innovative Finance ISA?

An Innovative Finance ISA is an Individual Savings Account (ISA) introduced to offer a new way to earn tax-free interest and returns through peer-to-peer lending and crowdfunding investments. IFISAs provide a flexible and potentially high-return option for many investors.

When investing in IFISAs instead of a Cash ISA vs Stocks and Shares ISA, savers can lend directly to individuals or businesses, earning interest and capital gains without paying tax. While IFISAs appeal to those exploring alternative investments, it’s also worth comparing them to providers offering the best Stocks and Shares ISAs, particularly if you’re balancing risk and seeking long-term growth through traditional investment vehicles like funds and equities.

This comparison can help investors diversify effectively across both mainstream and alternative ISA products.

Key Features of IFISA:

• Purpose: Allows individuals to invest in peer-to-peer loans and crowdfunding projects.

• Returns: Earn potentially higher returns compared to traditional savings accounts.

• Tax Benefits: Interest and gains are tax-free within the ISA allowance.

• Investment Limit: Up to £20,000 can be invested annually across all ISAs, including IFISAs.

• Accessibility: Flexible access to your investments, though terms can vary by provider.

• Risk: Investments in IFISAs carry risks, including the potential for borrower default and capital loss. Always consider the risk profile and do thorough research or seek financial advice.

• Lack of regulatory protection: IFISAs are not covered by the Financial Services Compensation Scheme (FSCS).

Investing in IFISAs can be an exciting opportunity to grow your savings while supporting innovative businesses and ventures. Make sure to explore different providers to find the best fit for your financial goals.

Pros and Cons

How does it work?

Innovative Finance ISAs (IFISAs) are specialised investment accounts that enable individuals to earn tax-free returns through peer-to-peer lending and crowdfunding. This overview details the key features and advantages of IFISAs, structured from the most relevant to less critical aspects:

• Higher Returns Potential: IFISAs offer the potential for higher returns compared to traditional savings accounts. By investing in peer-to-peer loans or crowdfunding projects, you can earn competitive interest rates exceeding conventional savings options. However, higher returns come with increased risks, including borrower default.

• Tax-Free Growth: Similar to other ISAs, the interest or returns earned within an IFISA are tax-free. For the 2025/26 tax year, you can invest a total of £20,000 across all ISAs, with no specific limit on how much can be allocated to your IFISA. This tax advantage enhances the growth potential of your investments.

• Investment Flexibility: IFISAs offer many investment opportunities, from lending to small businesses to participating in property loans. This flexibility allows you to diversify your portfolio according to your risk appetite and financial goals.

• Accessibility of Funds: While IFISAs generally offer more accessibility than traditional investments, the liquidity of your funds can vary depending on the specific investment terms. Some peer-to-peer loans might have fixed terms, so it’s crucial to understand the conditions before investing.

• Risk and Due Diligence: Investing in IFISAs involves risk, including the potential for capital loss and borrower default. It’s essential to perform thorough due diligence on the investment opportunities and consider each option's risk profile. Many platforms provide risk ratings and detailed information to help you make informed decisions.

• Regulatory Protection: While IFISAs are not covered by the Financial Services Compensation Scheme (FSCS) like cash ISAs, some platforms offer their own provisions to mitigate risks. Always check the specific protections provided by your chosen platform.

• Eligibility and Contributions: A minimum age of 18 years old is required to open an ISISA. Contributions are capped by the overall ISA limit of £20,000 annually, allowing you to allocate your investments across different types of ISAs, including cash, stocks and shares, and innovative finance.

• Provider Transfers: You can transfer your IFISA to a different provider if better interest rates or investment opportunities become available. This flexibility allows you to adapt to changing financial landscapes and optimise your returns. However, note that this product is less liquid and might require time. We highly recommend reading the IFISA conditions.

What are the risks involved?

Innovative Finance ISAs (IFISAs) typically involve lending your money to individuals or businesses through peer-to-peer (P2P) platforms. Unlike traditional savings or investment products, your capital is not protected by the Financial Services Compensation Scheme (FSCS). This means if the borrower defaults or the platform fails, you could lose some or all of your money.

Additionally, there may be limited access to your funds, especially if the loans haven’t been repaid or the platform lacks liquidity. It’s important to research the lending platform's track record, default rates, and the types of borrowers they deal with before investing.

How many IFISAs can you have?

While you can hold multiple IFISAs across different tax years, you’re only allowed to contribute to one IFISA in any given tax year as part of your annual ISA allowance (currently £20,000 for the 2025/26 tax year). You can also transfer money from other ISAs (Cash, Stocks & Shares, etc.) into an IFISA if the provider accepts transfers.

However, the key rule is: only one active IFISA contribution per tax year – although your existing IFISAs from previous years can remain open.

How to choose the best IFISA

Selecting the right IFISA depends on your risk appetite, investment goals, and preferred lending platform. Start by comparing interest rates, but also consider the platform’s historical performance, default rates, user reviews, and whether it offers auto-diversification tools to spread your risk across different borrowers.

It’s also worth comparing platforms alongside those offering the best Stocks and Shares ISAs, especially if you’re weighing up different ISA types. Some investors might even preferfinding the best trading platform that offers a broader range of investment products, including IFISAs, for more flexibility. Well-known brokers like Hargreaves Lansdown or AJ Bell, known for their extensive investment choices and beginner-friendly interface, which you can read about in our Hargreaves Lansdown review, and AJ Bell review, are good examples of platforms that offer this broader flexibility.

Transparency on fees and ease of withdrawing or selling investments is crucial. And while platforms that lend to businesses, property, or individuals carry varying levels of risk, make sure the provider is regulated by the Financial Conduct Authority (FCA) – though FCA regulation does not guarantee your funds.

Best IFISA Providers

When considering Innovative Finance ISAs (IFISAs), it's important to evaluate providers based on factors such as returns, loan security, platform reputation, and regulatory compliance. Here are some notable IFISA providers in the UK:

1. easyMoney

Recognised for its excellence, easyMoney was named IFISA Provider of the Year in both 2023 and 2024 at the Alternative Credit Awards.

They offer investments secured against UK property, with target returns ranging from 5.4% to 8% depending on the account. Their platform emphasises transparency and investor support.

2. Kuflink

Established in 2016, Kuflink's platform has facilitated over £360 million in lending. They offer a one-year IFISA with target returns of 8% after accounting for bad debts.

The minimum investment is £1,000, with funds diversified across numerous loans. ​

3. British Pearl

British Pearl's IFISA offers up to 4.4% tax-free earnings on property-backed investments per annum.

They manage all properties in-house, ensuring thorough due diligence, and ensure properties are income-producing before listing, allowing investors to earn from day one.

4. Sourced Capital

Awarded Best IFISA Provider in 2022, Sourced Capital offers property-backed loan investments with targeted tax-free returns of up to 12% per annum.

Investments are secured by a first legal charge on UK property, providing an additional layer of security for investors. ​

When selecting an IFISA provider, consider the following:

• Returns: Evaluate the interest rates offered and understand how they compare to other investment options.

• Loan Security: Look into how investments are secured, such as property backing or other collateral.​

• Platform Reputation: Research the provider's track record, user reviews, and any industry awards or recognitions.​

• Regulatory Compliance: Ensure the provider is authorised and regulated by the Financial Conduct Authority (FCA).​

Always conduct thorough research and consider seeking financial advice to ensure the chosen IFISA aligns with your investment goals and risk tolerance.

FAQs

How can I transfer into an innovative finance Ifisa?

To transfer into an IFISA, open an account with your chosen provider and complete their ISA transfer form. They’ll handle the process for you. There are strict withdrawal rules when it comes to ISAs so don’t withdraw the funds yourself, or you’ll lose the tax benefits. Transfers from other ISAs won’t affect your annual allowance.

Is an IFISA the right investment for me?

An IFISA is considered a high-risk investment product due to the higher risk of default, which on the other side, it could also lead to higher returns. However, you must be aware of the following information:

• IFISAs are NOT protected by the FSCS, meaning the regulator does not cover your investments if the IFISA provider stops operations.
• Peer-to-peer lending involves high risks, and some entities have collapsed in recent years.
• Due to the nature of the investments (loans, debt, crowdfunding, etc.), withdrawing from them might be quite difficult.

In other words, we could say that IFISA might be the right product for you if you have experience with these types of investments.

How much money do you need to open an IFISA?

The minimum amount needed to open an Innovative Finance ISA (IFISA) varies depending on the provider. Some platforms allow you to get started with as little as £100, while others may require £1,000 or more.

It’s important to check each provider’s minimum investment requirements before opening an account.

Can you transfer other ISAs into an IFISA?

Yes, you can transfer funds from other types of ISAs — such as Cash ISAs or Stocks & Shares ISAs — into an IFISA. However, the process must follow official transfer rules to maintain your tax-free allowance.

Always initiate the transfer through your chosen IFISA provider to avoid losing the tax benefits.