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THE INNOVATIVE FINANCE ISA (IFISA)

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A CROWDLORDS GUIDE TO TAX FREE PROPERTY INVESTMENTS


THE INNOVATIVE FINANCE ISA (IFISA) THE INNOVATIVE FINANCE ISA (IFISA)

2 CrowdLords.com 3CrowdLords.com

1. INTRODUCTIONWHAT IS AN INNOVATIVE FINANCE ISA?

CONTENTS

Introduced by the UK Government in 2016, the Innovative Finance ISA (IFISA) simply allows investors to use some, or all, of their annual ISA allowance to invest in the new, innovative investment options. This is done specifically through Alternative Finance platforms that include P2P lending and Crowdfunding.

These P2P and Crowdfunding platforms are regulated by the Financial Conduct Authority (FCA) and include three key sectors;

• Personal loans• Small business loans• Property loans

You can use your IFISA for each of these categories and any interest gained is tax-free.

IFISAS AND PROPERTYIFISA investments made via P2P lending or Property Crowdfunding are all debt-based loans, which means that investors will typically receive a fixed tax-free interest over the loan term. If it’s a property loan, it will usually be secured via either a 1st or 2nd charge over the property assets.

Many people feel that this security is essential. Most property loans are made to property professionals buying property to either rent out, or to develop and sell. Having a charge over the property assets means that in the event of a default, the property can be sold to recover your capital and any outstanding interest. It’s worth noting that this is rarely the case when lending to private individuals (Personal loans) or to non-property businesses (Small business loans).

* It is possible that the value of the asset may fall and you could lose all or some of your original capital

1. Introduction

2. The IFISA explained

3. The evolution from ISA to IFISA

4. Balancing your IFISA allowance

5. Using your IFISA to invest in property

6. 7 Reasons why IFISA is a good idea

7. Understanding the Capital Stack

8. Reducing risk through diversification

9. It’s best not to delay



2. THE IFISA EXPLAINED

IN A NUTSHELL;

The IFISA opens up new opportunities for the savings you have that may already be held in Cash ISAs or Stocks and Shares ISAs. It does this by using alternative, or innovative finance.

One example of this innovative finance is debt investments in property crowdfunding platforms like CrowdLords.

Although all ISAs offer tax-free returns, with an IFISA, interest rates offered to investors tend to be much higher than standard Cash ISAs. This is because when you invest via P2P lending or Property Crowdfunding, you are, in effect, acting as a bank yourself, lending your money directly to property professionals. Removing the banks in this way means that the borrowers potentially pay less interest and fewer fees, whilst still paying decent returns to you and the other investors.

However, you should note that IFISA investments via P2P lending and Property Crowdfunding platforms are not protected by the Financial Services Compensation Scheme (FSCS) so there is an additional element of risk involved. Capital can be lost and not recovered, and the platforms are not obliged to reimburse investors

3. THE EVOLUTION FROM ISA TO IFISAThe ISA, which was introduced on 6th April 1999, initially replaced Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). Since then, they have evolved into many forms, aimed at different groups of people with specific financial needs.

Instant-access cash ISAs – you can pay in money and withdraw money at any time, whilst being covered by the Financial Services Compensation Scheme (FSCS)

Regular savings cash ISAs – usually pay a fixed rate of interest over a certain time on the proviso that you pay in a certain amount of money each month. (You can contribute £1666 each month without breaching the £20,000 annual limit)

Fixed-rate cash ISAs – you’ll need to commit to locking your money away for a fixed amount of time in order to be rewarded with a higher interest rate. Generally, the longer the term, the more interest you’ll earn.

Stocks and shares ISA – this is an investment account where all capital gains are protected from tax. As with a cash ISA, you can pay in £20,000 during a tax year. Usually, you can choose between managing your investments yourself, or, for a fee, having them managed for you. There are risks involved with stocks and shares ISAs, and as with any form of investment, you may get less capital back than the amount you put in.

Innovative Finance ISA – known as an IFISA, the most common use is to lend to borrowers who do not want to use a traditional bank loan, maybe for property development projects or a small business looking to expand. It connects them with lenders directly, removing the bank as a middleman. Investors receive a rate of interest when the borrowers pay back the money invested. This is not covered by the FSCS scheme.

Help to Buy ISA – is a government-backed ISA savings account to help first-time buyers get on the housing ladder with property valued up to £250,000. Upon opening the Help to Buy account you can deposit up to £1,200, then pay in £200 a month thereafter. This means that in the first year, you can save up to £3400. The government then pays a 25% bonus on what you save up to a maximum of £3,000.

Lifetime ISA – aimed at anyone between the ages of 18-39, this is another government-backed scheme to help people in their retirement, specifically involving your pension or buying a house. The government will pay a 25% bonus on whatever you save up to a maximum of £1,000 each year. If you’re using this ISA for your retirement, you can only pay into the account until you’re 50, and must wait until you’re 60 to be able to withdraw it.

Junior ISA – the Junior ISA is for under 18s and offers an option for a parent or legal guardian to pay in money each year until the child is 18 years old, when it then turns into a normal adult ISA. The annual limit of money paid in is £4,080 and doesn’t form part of your annual £20,000 allowance as it is in the child’s name.



5. USING YOUR IFISA TO INVEST IN PROPERTYMaking the most of your IFISA to invest in property opens up numerous different possibilities for you.

At some point, you need to decide whether you wish to invest in Senior Debt, secured with a 1st charge over the property assets, or in Junior Debt, which has a 2nd charge. Often considered the least risky option, Senior Debt offers you a fixed-rate interest return, but because you will be repaid before other lenders and investors in the case of indebtedness, interest returns are typically lower than other options.

Investing via Junior Debt (usually referred to as Mezzanine Debt in property), secured via a 2nd charge, carries more risk as all fees and repayment obligations to Senior Debt lenders must be met first in the case of indebtedness. However, as a result, the interest returns are typically higher.

Perhaps the most appealing aspect of investing using an IFISA in this way is the control you have as the investor. Prior to the launch of the IFISA, most Stocks and Shares ISA accounts involved the use of Tracker Funds. As such, investors had little or no control over where their capital was being invested, but the IFISA allows you control over;

• WHERE YOU INVEST – as the investor you have complete control to choose the P2P or Property Crowdfunding platforms you wish to use

• HOW YOU INVEST – you decide which method of investing is right for your financial circumstances and can choose between the Senior Debt or Mezzanine Debt

• WHEN YOU INVEST – you are empowered to invest on your own timescales, and you can diversify your investment portfolio as and when you see fit

• WHAT YOU INVEST IN – you can choose the individual projects you wish to support, after completing your own personal checks or any additional Due Diligence you wish to carry out before committing

4. BALANCING YOUR IFISA ALLOWANCE

The most you can pay into your ISA has swelled substantially over the last decade. Prior to the 2010/2011 financial year, the ISA allowance was limited to £7200 and then it increased moderately to £10,200. Now, in the 2019/2020 financial year, the limit has been set at £20,000.

TRANSFERRING EXISTING ISA BENEFITS INTO AN IFISACrowdLords allows you to transfer as much as you want from the ISAs that you’ve accumulated over the years into your CrowdLords IFISA account, all without affecting your current year’s annual allowance.

For example, you could hypothetically transfer £75,000 previously held in a Stocks & Shares ISA into your current IFISA as long as those funds were subscribed in an earlier financial year.

Follow these simple steps to transfer your ISA;

• Read and agree to the CrowdLords IFISA terms and conditions, entering your NI Number

• Select your existing ISA provider

• Provide and complete information about the ISA you wish to transfer (type of ISA and account number / sort code

• State how much you wish to transfer

• Print your ISA Transfer Request Form

• Sign and date the form, then post it to us

This £20,000 can be spread across:

CASH ISAs IFISAs STOCKS & SHARES ISAs

It is important to remember that the total of £20,000 can be sub-divided to fit into the three different categories, for example;

£6,666.67 CASH ISA

£6,666.67 IFISA

£6,666.66 STOCKS & SHARES ISA

£5000 CASH ISA

£10,000 IFISA

£5000 STOCKS & SHARES ISA

£0 CASH ISA

£20,000 IFISA

£0 STOCKS & SHARES ISA

£2

0,0

00

£2

0,0

00

£2

0,0

00



6. SEVEN REASONS WHY IFISAS ARE A GOOD IDEA1. Any interest earned is exempt from tax

2. IFISAs can include transfers of funds accumulated in previous years and held within either Cash ISAs or Stocks & Shares ISAs without affecting your annual ISA allowance

3. All interest received is held in your tax-free wrapper without using any more of your ISA allowance, which means you can reinvest and earn interest on your interest

4. They involve alternative forms of finance, removing the “middle-man” meaning borrowers have the opportunity to pay less interest and investors have the potential to receive higher returns*

5. You can spread your £20,000 annual ISA allowance across different types of ISA, opening a Stocks & Shares ISA and/or a Cash ISA along with your IFISA in the same tax year

6. Investing through an IFISA is easy and transparent and you have complete control over which loans to participate in, meaning you can diversify your portfolio to help mitigate risk

7. It is easy and accessible for everyone to set up – you must be 18 years old, be a permanent

resident of the United Kingdom, and have a National Insurance number

* Historic default rates and forecasts of interest returns are not an indicator of future performance and capital is at risk once invested. Returns not guaranteed.

7. UNDERSTANDING THE CAPITAL STACK

As many property developments are multi-million pound projects, funding is usually provided by a variety of sources. The overall structure is then made up of different layers that are referred to in the industry as the “Capital Stack”.

If you’re at the top of the stack with equity in the development, you will reap greater rewards from its appreciation in value and eventual sale price as you are essentially a part owner, sharing in any profit generated. However, the risk is considered to be greater because if the profits are less than projected, so are your returns. In addition, if the project were to make a loss, equity investors are not repaid until all debt financiers have first been paid, and you could potentially lose part or all of your original investment.

For those who are not comfortable with the equity risk,

THE CAPITAL STACK

ORDE

R OF P

RIORIT

Y

TOTAL

Common Equity Preferred EquityMezzanine Debt Senior Debt

there are the debt options. Senior or Mezzanine Debt investors will receive interest paid from the profit generated by the property as fixed interest returns. Senior Debit is typically secured via a 1st charge on the property, and is therefore paid first. Mezzanine Debt is secured via a 2nd charge, and is paid second.

It is quite common for property developments to source capital from more than one entity; typically, higher positions in the Capital Stack have higher projected returns due to the higher risk as a result of the order of priority.

Whether it is with a debt-based investment or equity investments, individual lenders are starting to replace banks, insurance companies and other entities traditionally known for providing development capital.

Until recently, it was difficult for private investors to enter the property market at any other point that the buy-to-let market unless they happened to be ultra-high-net worth individuals themselves. Now, both debt financing and equity ownership is available through Property Crowdfunding, offering a range of potential returns at various levels on the Capital Stack.



8. REDUCING RISK THROUGH DIVERSIFICATION

At CrowdLords, we highly recommend that investors diversify their investment portfolios by spreading their capital across multiple loan opportunities.

Although this is no guarantee against potential losses, it can mitigate some of the risks involved in Property Crowdfunding investments.

By not putting all your eggs in one basket and spreading your capital across different investments, you’re protecting yourself against the chances that a loan might go into default.

We strongly recommend that you place no more than 10% of the amount you intend to invest in one particular project.

We also recommend that you create a balanced portfolio with some lower risk, lower return loans, alongside some higher risk, higher return investments. The balance will depend on your attitude towards risk as well as your personal financial situation. It’s good to get advice from an IFA if you’re not sure.

You can also diversify across different types of property – residential developments alongside mixed use or commercial developments; flats versus houses; projects in the north and projects in the south; or developments alongside rental properties. The greater the variety, the less impact market fluctuations will have on your portfolio.

9. IT’S BEST NOT TO DELAY!

Normally, within the investment community, we are used to seeing people rush to use up their ISA allowances just before the 5th April comes around. This means that every March, investors are under pressure to make hasty investment decisions to avoid losing their allowance. Hasty decisions are rarely the best decisions and so we recommend investing as early in the financial year as you can. That way, if you have the funds available, you are making the most out of your ISA allowance.

Knowing that the total IFISA allowance for the year is £20,000, then even looking at a very conservative 5% p.a. return, over the 11 months of the tax year that you’ve waited, you could easily have lost £1000 of tax-free income.


12 CrowdLords.com

Find out more at: crowdlords.com

CrowdLords.com | [email protected] | +44 (0) 20 7183 1067

Investment in property comes with risks as well as the possibility of rewards. These investments should be considered to be long term investments as it may not be possible for you to get your capital back before the term expires and you could suffer loss of capital. The value of the property can go down as well as up and such fluctuations will affect the amount of capital you receive back at the end of the term of the investment. Any regular payments offered may also be affected by factors such as the market rental value, periods of non-occupancy and unforeseen refurbishments. There is no secondary market for investments in unlisted securities. The property investments offered here are illiquid, you may not be able to sell your investment to third parties and your capital is at risk. Any references to past or forecasted performance should not be relied upon as a guarantee of future results. If you are in any doubt, you should seek advice from an FCA regulated adviser. CrowdLords cannot advise you on whether the merits or risks of an investment are right for your circumstances. The information above is intended to illustrate that there are a variety of property investments available through the CrowdLords platform and is not intended to be a financial promotion. CrowdLords investments are targeted solely at investors who are sufficiently sophisticated to understand these risks and make their own investment decisions. You will only be able to view full property investment details once you have been

assessed as sufficiently sophisticated by CrowdLords.

In respect of its regulated activities, CrowdLords Limited is an appointed representative of Share In Ltd, which is authorised and regulated by the Financial Conduct Authority (No. 603332).”)

IFISAS FROM CROWDLORDSSecured via either a 1st or 2nd charge against property assets, all CrowdLords IFISA investments are loans to professional property developers and landlords, usually supported by a Personal Guarantee and a Debenture

With CrowdLords, you can use your IFISA to invest up to £20,000 in bonds (or any other debt instruments on our platform) into our property loan opportunities, in any given tax year.

REGISTERING FOR A CROWDLORDS IFISA

If you are 18 years old (or over), and you permanently reside in the United Kingdom (not a resident of the Channel Islands or the Isle of Man), you are eligible to set up a CrowdLords IFISA.

The process is quick, simple and straightforward. It is completely free to set up, with no fees or charges to investors.

STEP 1 Simply visit our platform at www.crowdlords.com

STEP 2 Click on “Account” in the top right-hand corner

STEP 3 Select “ISA” on the dropdown menu

STEP 4 Choose “Open a new ISA”

STEP 5 Accept the Terms and Conditions and enter your NI Number

STEP 6 Choose an investment opportunity on our platform that is IFISA eligible and use some or all of your annual allowance of £20,000 to earn tax-free potential returns

* Historic default rates and forecasts of interest returns are not an indicator of future performance and capital is at risk once invested. Returns not guaranteed.

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