IF-ISA to drive investment in British business
Most investors will be familiar with the Individual Savings Account, or ISA, the tax-free “wrapper” which has seen billions of pounds committed since launch in 1999. The most well known and popular forms of the ISA are the Cash and Stocks & Shares ISAs, which at the end of the 2015/16 tax year held assets with a combined market value of £518 billion – split 52%/48% respectively between cash and shares. But a new tax free product, launched by the government last year, could be about to see a huge inflow of funds, ear-marked for investment in fast-growing British businesses.
The Innovative Finance ISA, also known as the IF-ISA, was introduced in April last year in response to the increasing popularity of alternative finance amongst investors. It allows loans organised by peer-to-peer lenders and bonds arranged by crowdfunding companies to earn interest income tax free if put within the IF-ISA wrapper.
According to the latest Alternative Finance Industry Report from innovation charity Nesta, alternative finance is taking an increasing share of small business lending and start-up investment. Alternative finance business lending stood at 12% of the market for lending to small businesses in the UK in 2015, with peer-to-peer business lending rising in value by 99% to £1.49 billion.
The launch of the IF-ISA means that alternative sources of small business lending should continue to grow strongly, especially with more investors being attracted to the industry by the return boosting tax-free element which is now available. For example, take the 12% “crowd bond” currently being offered by golf training aid company Explanar on the Crowd for Angels platform. Higher rate tax payers putting all of their £20,000 annual ISA allowance into the bond would make a substantial tax saving of £960 on a total annual return of £2,400, assuming they had already used up their Personal Savings Allowance.
As a result of the tax savings, combined with substantially higher interest rates on offer compared to Cash ISAs, many major players in the industry expect a significantly higher amount of funds to be made available for smaller businesses because of the IF-ISA.
Tony de Nazareth, Director and Founder of Crowd for Angels, explains, “For too long savers and investors have seen derisory rates of return on their Cash ISAs so we expect there to be a meaningful movement of funds into IF-ISAs during the current tax year. Even if only 1% of the money currently in Cash ISAs is transferred and invested into IF-ISA eligible bonds that means another £2.7 billion of cash will be made available for British businesses to grow their operations.”