Future of the IFISA in doubt

The Innovative Finance ISA (IFISA) could be abolished and amalgamated into a streamlined investment ISA, as part of sweeping reforms of the tax wrapper later this month.

Chancellor Jeremy Hunt is expected to make significant changes to the ISA market in his Autumn Statement on 22 November.

Treasury sources, cited in recent media reports, have outlined ministers’ ambitions to simplify the market and encourage more people to save in ISAs.

Proposals include the creation of a single ISA, the abolition of less popular ISAs including the Lifetime ISA and the IFISA, and an increase to the ISA limit which currently stands at £20,000 a year.

Read more: easyMoney chief says investors are attracted to IFISAs in uncertain times

Sarah Coles, personal finance analyst at Hargreaves Lansdown, supports the idea of streamlining the ISA market.

“One reason IFISAs were set up as separate to the stocks and shares ISA was because you can’t have more than one ISA of each type per tax year,” she said. “It meant you could use the IFISA for a small peer-to-peer investment and get a separate stocks and shares ISA for the rest of your ISA allowance.

“By changing the rules to mean you could pay into more than one ISA of each type in any tax year – as long as you stay within the overall allowance – you could roll IFISAs into stocks and shares ISAs and streamline the range.”

Read more: IFISA “still a viable product”

However, other stakeholders are concerned about the impact of such a change on the P2P sector, with one warning that it is “damaging to have that uncertainty hanging over the industry”.

Alternative Credit Investor understands that the UK Crowdfunding Association has been lobbying the Treasury in defence of the IFISA, and has been in discussions over the future of the P2P lending tax wrapper.

“I think that the chancellor will be finding the idea of amalgamating all ISAs seductive,” said Neil Faulkner of P2P research firm 4th Way.

“It’s pretty common that subtle impacts of new policies are initially missed by the Treasury, especially in the politicised environment of Budgets and Autumn Statement. This could lead to some temporary turbulence and uncertainty about the future of IFISAs.

Read more: Two more IFISA managers removed from register

“In particular, I would point out that all the ISAs other than stocks and shares ISAs and cash ISAs make up a much smaller part of the market, with correspondingly fewer powerful voices having the chancellor’s ear. He might therefore initially make a bit of a mess when it comes to the other ISAs, including IFISAs.”

Faulkner has predicted that the chancellor could make modifications to policy changes in the weeks following the announcement, subject to the reaction.

“With IFISAs specifically, he’ll realise that it’s not so easy to abolish them completely and just expect that suddenly those investments will be incorporated into some new kind of multi-asset ISA,” Faulkner added.

“Once the chaos subsides, there are also potential advantages if it means that investors will ultimately find it quicker and easier to diversify across lots of P2P lending and alternative lending, alongside their other savings and investments.”

Read more: Autumn Statement: Jeremy Hunt plans ISA overhaul

P2P lending platforms have spoken out in defence of the IFISA, arguing that the product has a special place in the market with far-reaching benefits.

“We can only see the positives in the IFISA product,” said a spokesperson from Invest & Fund. “One factor potentially overlooked in a debate focused on the complexity of retail consumer choices is that IFISA investments help to fund UK businesses and enhance innovation on a grassroots level.

“The IFISA product allows investors to contribute directly to the success of the UK economy and support UK businesses, two goals wholly aligned with the government’s own objectives. These key factors will be taken into consideration when decisions are made.”

Read more: BLN loses IFISA authorisation as administration concludes

Rishi Zaveri, chief executive of Lendwise, said he understood why the government was reviewing the ISA market but said he hopes they do not abolish the IFISA, as “it’s definitely helpful for those investors who want to do something a bit more targeted with their money (such as education finance).”

A Treasury spokesperson said: “The Treasury is receptive to ideas of how we can make ISAs more attractive to encourage people to develop a savings habit and to invest in a way that works for them”.

HMRC data showed that £144m was put into IFISAs in the 2021/22 tax year, up from £92m the previous year.

However, it should be noted that IFISA volumes are substantially down from their 2019/20 peak, when £995m was invested into the product.

Read more: Inflation gap can be closed with IFISAs