Innovative Finance ISAs

An Innovative Finance ISA, sometimes called an IFISA or a crowdfunding ISA, is a type of ISA that lets you use your tax-free ISA allowance for peer-to-peer lending, matching you as an investor with borrowers who could be individuals, businesses or property developers¹. It was created as a third ISA type alongside cash ISAs and stocks and shares ISAs, following a government decision in 2015 to give peer-to-peer loans the same tax advantages as other ISA investments².

The tax treatment is the attraction: interest and gains you receive on qualifying loans held in the ISA are free of tax, within the usual £20,000 annual ISA allowance³. The catch is equally important. This is an investment, not a savings account. Your money is lent out, your returns depend on borrowers repaying, and you can get back less than you put in. There is no deposit protection for investment losses of this kind.

What an Innovative Finance ISA is and what it can hold

In legal terms, an Innovative Finance ISA is an individual savings account that includes an innovative finance component, and an account is made up of a single innovative finance component only². The idea came out of two government consultations in 2015: one on including peer-to-peer loans, which led to the decision to introduce the new ISA type⁹, and one on extending it to investment-based crowdfunding, with a commitment to keep exploring the case for equity-based crowdfunding¹⁰. The Financial Conduct Authority then planned the detailed permissions, describing a new component allowing loan-based crowdfunding investments to be included in ISAs¹¹.

The range of things it can hold has grown steadily:

• Peer-to-peer loans. From 6 April 2016, interest and gains from peer-to-peer loans qualified for tax advantages where the loans are made through the ISA¹². Peer-to-peer loans cannot be held in a stocks and shares ISA, only in an Innovative Finance ISA¹³.
• Crowdfunded debt securities. Interest, gains and other payments from certain debt securities offered via a crowdfunding platform qualify, a change confirmed in 2016 and applied from autumn 2016¹⁴.
• Notice-period investments. From 6 April 2024, certain investments subject to a notice period, which means they cannot be held in a stocks and shares account, may be held in an innovative finance account¹⁵. This covers investments that would otherwise qualify for a stocks and shares ISA if not for their limited liquidity¹⁶.
• Long-term asset funds and open-ended property funds. Long Term Asset Funds were added to the qualifying investment types¹⁷, and the permitted range was expanded to include long-term asset funds and open-ended property funds with extended notice periods from 6 April 2024⁵.
• Cryptoasset exchange traded notes. Independent guidance lists cryptoasset ETNs among the investments an Innovative Finance ISA can now hold⁶.

The common thread is that an Innovative Finance ISA can hold things that are too illiquid, or too unusual, for a stocks and shares ISA. That flexibility is also the source of its main risk, covered below: investments you cannot easily sell are investments you cannot easily turn back into cash.

Tax-free interest within the £20,000 ISA allowance

The annual ISA allowance is £20,000, and it covers everything you pay into all your ISAs in a tax year combined: cash, stocks and shares, innovative finance and Lifetime ISAs together⁵. ISAs let you save or invest up to £20,000 a year without paying tax on the interest or gains you earn¹⁹. Within an Innovative Finance ISA, interest and gains from qualifying investments are tax free²⁰.

Two points about how the allowance works in practice:

• Interest and growth do not use the allowance. Only new money you pay in counts. A balance that grows past £20,000 through returns is fine; it is fresh deposits that are capped¹⁸.
• Uninvested cash is treated differently from April 2027. Money sitting in an Innovative Finance ISA waiting to be invested will no longer be entirely tax free. From April 2027, any interest earned on cash in the account that is not currently invested will face a 22% tax charge⁶. The government's anti-circumvention rules introduce a 22% charge on interest paid on cash holdings held in stocks and shares and Innovative Finance ISAs⁷.

The limits for Innovative Finance ISAs, Lifetime ISAs and stocks and shares ISAs remain the same from April 2027, even as the cash ISA limit changes⁸. If you are weighing this up against other options, the guides to the ISA allowance and ISAs and tax cover the detail.

Who can open one: aged 18 or over

You must be 18 or over to subscribe to an Innovative Finance ISA⁴. A qualifying individual who is 18 or over may only subscribe to a single innovative finance account in a particular year, with a limited exception for certain transfers³.

Since 6 April 2024, the rules on opening ages were harmonised at 18 years for ISAs generally, to simplify the rules for investors and ISA managers¹⁶. Investors who were 16 or 17 on 6 April 2024 keep transitional rights for existing accounts¹⁶. The practical effect is that an Innovative Finance ISA has the same minimum age as every other adult ISA, and the guide to who can open an ISA sets out the exceptions for younger savers with cash ISAs and Junior ISAs.

Since the April 2024 reforms you can also open and pay into multiple ISAs of the same type in one tax year, as long as you do not exceed the overall £20,000 deposit limit²¹. So you could hold an Innovative Finance ISA with one platform and a cash ISA elsewhere in the same year, splitting the allowance between them.

Your capital is at risk and returns depend on borrowers repaying

This is the section that matters most. An Innovative Finance ISA is most commonly used for peer-to-peer lending, which matches investors with borrowers who could be individuals, businesses or property developers⁶. Your return comes from those borrowers repaying with interest. If they do not repay, your return falls, and if enough of them default you can lose money overall.

The risk sits in a different place from a stocks and shares ISA. In a stocks and shares ISA, the success of your investments depends on the market and there is no guarantee you get your money back¹³. In an Innovative Finance ISA, the value does not fluctuate day to day in the same way, but the same warning applies in a sharper form: the value of investments can fall as well as rise, and you may get back less than you put in²². With loans, "falling in value" mostly means borrowers failing to pay.

There is no FSCS-style deposit protection for this. FSCS protects cash in deposit-taking institutions; it does not protect you against an investment losing money or against borrowers defaulting. The rules also require that payments under a qualifying loan agreement must be such as might reasonably be expected under a similar agreement entered into in the open market, which is a test of whether the investment is a genuine commercial arrangement rather than a guarantee of any kind³.

The Financial Ombudsman Service can look at complaints about ISAs, including Innovative Finance ISAs, where a provider has gone wrong, for example in how it described risks or administered the account¹. The ombudsman cannot compensate you simply because borrowers defaulted or the investment performed badly. The guide to how your ISA is protected explains where protection starts and stops.

Getting your money out: withdrawals, flexibility and secondary markets

Getting money out of an Innovative Finance ISA is not like withdrawing from a cash ISA, because the money is tied up in loans that run for a fixed term. There are two routes out: the loans finish and repay, or you sell your loan parts to someone else.

Loan repayments. As borrowers repay, cash builds up in your ISA. What you can do with it depends on the platform: some automatically reinvest it into new loans, others leave it as cash until you choose.

Selling on a secondary market. Many platforms run a secondary market where you can offer your loan parts for sale to other investors⁶. This is not guaranteed: there has to be a buyer, and in difficult market conditions there may not be one.

Flexible ISA rules. A cash, stocks and shares or innovative finance ISA may operate flexibly, allowing the investor to withdraw and replace funds within the same tax year¹⁶. A flexible ISA allows you to withdraw money and pay it back in again within the same tax year without it affecting your ISA allowance²². Flexible ISAs let you withdraw funds and replace them without the replacement counting further towards your allowance, as long as you do so into the same account in the same tax year, and this applies to cash held in a stocks and shares ISA and an Innovative Finance ISA too²³. Providers are not obliged to offer flexibility, so check whether your platform does²³.

The distinction matters for your allowance. An ISA that is not flexible counts every deposit you make as part of your allowance, so money withdrawn and paid back in uses allowance twice²². The guide to flexible ISAs and taking money out of an ISA go into this in more depth.

Where selling a loan early may not be possible

The flexibility described above has hard limits. Some investments held in an Innovative Finance ISA are there precisely because they are subject to a notice period that rules them out of a stocks and shares ISA¹⁵. A notice-period investment cannot simply be sold on demand: you may have to give notice and wait, or accept whatever the secondary market will pay.

Where no active secondary market exists, or where there are no buyers, your realistic options are to hold the loan to maturity or to sell at a discount. Independent guidance on Innovative Finance ISAs notes that you will not be able to simply transfer existing peer-to-peer investments into an Innovative Finance ISA if the site you invest with launches one, which shows how these holdings sit outside the normal machinery of ISA transfers⁶. The same illiquidity that makes an investment eligible for this ISA type is what makes early exit uncertain.

In practice, treat any money you put into an Innovative Finance ISA as money you can do without for the full term of the loans you buy. If you may need the money at short notice, the comparison of an Innovative Finance ISA against a cash ISA sets out the trade-off.

When lender and borrower are connected

Not every loan qualifies. The ISA rules exclude loans between connected people: a loan made by a person who is connected to the account investor is not a qualifying loan, with "connected" given its meaning in tax legislation²⁵. This stops the ISA wrapper being used to receive tax-free interest from loans to yourself or to people or entities closely tied to you.

Similar anti-avoidance tests apply to other qualifying investments. A debenture held in an Innovative Finance ISA must not be connected with any other investment held outside the account by the account investor or any other person. Connectedness is tested by whether either investment was made with reference to the other, or on terms that would have been significantly less favourable without the other²⁰.

The same principle was extended to peer-to-peer arrangements in later amendments: the investment will not qualify where there is a close relationship between lender and borrower, mirroring the crowdfunding rules²⁶. If a platform offers you loans to a business you control, or to a family member, those loans are unlikely to qualify for the ISA tax advantages, and the guide to invalid ISA subscriptions explains what happens when money ends up in an ISA that should not have.

Transferring an ISA into or out of an Innovative Finance ISA

You can transfer any money already in a cash ISA or stocks and shares ISA into an Innovative Finance ISA offered by a peer-to-peer provider⁶. To do it, you complete a transfer form with the Innovative Finance ISA provider you want to switch to⁶. Transfers into an innovative finance account require the investor to be 18 or over³.

The mechanics matter. Transfers take place in cash, so if you hold stocks and shares ISAs, all of your investments would be sold and the cash used to invest⁶. Transfers to Innovative Finance ISAs should take no more than 30 working days⁶.

Transfers out of an Innovative Finance ISA are also possible. Under the current rules, subscriptions in a stocks and shares account or an innovative finance account, both the current year's and previous years', may be transferred to a stocks and shares account, another innovative finance account, a Lifetime ISA, or a cash account if the investor is 65 or over at the end of the year²⁷. The right to move money from stocks and shares ISAs into cash ISAs was itself introduced in 2014, when the old prohibition on such transfers was revoked²⁸, and firms are guided by industry transfer guidelines when handling the process³⁰.

The guides to how to transfer an ISA, transfer times and partial transfers cover the practical steps, and compensation for delayed transfers explains your rights if a transfer drags on.

From April 2027: no transfers into cash ISAs for under-65s

The freedom to move money out of an Innovative Finance ISA into a cash ISA is being withdrawn for most people. From 6 April 2027, the Individual Savings Account (Amendment) Regulations 2026 provide that transfers from a stocks and shares ISA or an Innovative Finance ISA to a cash ISA are prohibited where the account holder is below the age of 65³¹. HMRC's guidance states the same: no transfers from stocks and shares and Innovative Finance ISAs to cash ISAs for investors under 65 from 6 April 2027, alongside a charge on any interest paid on cash held in those ISAs³³. Transfers from non-cash ISAs into cash ISAs will not be permitted, while it will remain possible to transfer from a cash ISA to a non-cash ISA⁸.

The context is the reform of the cash ISA limit. From April 2027, under-65s will be able to put a maximum of £12,000 of the £20,000 allowance into a cash ISA, with the rest available for stocks and shares or Innovative Finance ISAs, while those 65 and over can split the allowance as they wish²¹. The transfer ban and the 22% charge on uninvested cash are anti-circumvention measures designed to stop investors routing money into a cash ISA by another route⁷.

If you hold an Innovative Finance ISA and are under 65, the practical effect is that money moved into it from April 2027 cannot later be parked in a cash ISA. Money already in a cash ISA can still move the other way⁸. The page on changes to the cash ISA limit covers the wider reform.

How to open an Innovative Finance ISA with a P2P platform

Innovative Finance ISAs are offered by peer-to-peer lending platforms with the appropriate regulatory permissions⁴. Not every P2P platform offers one, and the platform must be authorised to do so; you can check a firm's permissions on the FCA Register.

The process, in outline:

1. Choose a platform and check its permissions. Innovative Finance ISAs are offered by peer-to-peer lending platforms with the appropriate regulatory permissions, so a platform must be authorised to manage one⁴.
2. Open the ISA account. The minimum age is 18 or over³. Opening follows the standard ISA rules, with the usual cancellation rights when a new ISA is first opened; the guide to cancelling and cooling off explains these.
3. Fund it. New money paid in counts towards the £20,000 allowance, and existing ISA money moved by transfer keeps its tax-free status, unlike money withdrawn and re-paid-in⁶.
4. Choose your loans or investments. The platform presents the available investments, which carry risk warnings. Interest on cash left uninvested faces a 22% charge from April 2027⁶.
5. Decide on reinvestment. Platforms differ on whether repayments are automatically lent on again, and on whether the account operates flexibly, allowing money to be withdrawn and replaced¹⁶.

If things go wrong with the provider rather than the loans, complain to the platform first and then to the Financial Ombudsman Service, which handles complaints about ISAs¹. The guide to complaining about an ISA provider sets out the steps.