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Fintech Tips: How to set up an Innovative Finance ISA?

How to set up an Innovative Finance ISA, which is only in its third year.

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The then Chancellor George Osborne first announced this new type of investment product in 2015, which went on sale to the public a year later.

After a slow start, in the 2016/17 tax year, just 5,000 customers opened Innovative Finance ISAs with a total of £36m subscriptions, according to HMRC data.  However, in the following 2017/18 tax year, this jumped to 31,000 customers investing £290m in the product.    

We look at how to open an innovative finance ISA.

What is an ISA?

ISA stands for individual savings account, and is an account you do not pay tax on.

How much can you save in an ISA?

You can save up to £20,000 a year (for the 2019/20 tax year), across a number of different types of ISAs. This can be a cash ISA, a stocks  and shares ISA, an innovative finance ISA, a Help to Buy ISA, a Lifetime ISA or a mixture of all of them.

However, for Help to Buy ISAs and Lifetime ISAs, there are limits about how much you can put into them, around a quarter of the current total, but leaves you free to put the additional cash into any of the other options.

What is an innovative finance ISA?

An innovative finance ISA is a riskier investment in anything from peer-to-peer lending to consumers, businesses, property and crowdfunding. As with other types of ISA, any interest you get from this type of product is not taxed. However, the fact that you are lending money means there's a chance the borrower will not repay the debt.

What does the regulator say about innovative finance ISAs?

The Financial Conduct Authority (FCA) said in April it had “seen evidence” that innovative finance ISAs are being promoted alongside safer cash ISAs.

But the watchdog added that innovative finance ISAs are “generally high-risk” products that often back mini-bonds or peer-to-peer investments.

The FCA said these products are often not covered by the Financial Service Compensation Scheme “so customers may lose the money invested or find it hard to get back”.

Ok, I understand I’m taking a risk. How do I go about taking out an innovative finance ISA?

A number of platforms sell these types of products such as Ratesetter,Landbay, LendingWorks and CapitalRise.

Once you have settled on a company, clicking on their innovative finance ISA button will take you through the application process that usually takes a few minutes.

Anything else I should bear in mind?

It is important to choose the firm that offers the right innovative finance ISA for you, because regulations dictate that you can only hold one account, with one financial services firm at a time.

But that does not mean you are stuck with one platform throughout the year. If you see a rival firm offering better rates, you can switch provided you transfer the entire amount you have in innovative finance ISA in financial services firm A over to financial services firm B.      

What if I get cold feet?

Every customer is entitled to a statutory 14-day right of withdrawal after subscribing to an innovative finance ISA. This means you will be able to take back all of your funds free of charge restored your ISA allowance, with the transaction deemed to have never taken place.

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