Table of Contents
- Understanding the Innovative Finance ISA
- How IFISAs Work
- Types of Investments Available in IFISAs
- IFISA Allowance and Tax Benefits
- Transferring Existing ISAs to an IFISA
- Understanding the Risks of IFISAs
- Who Should Consider an IFISA?
- The IFISA Landscape in 2025
- Comparing IFISAs with Other ISA Types
- Getting Started with an IFISA
- Managing Risk in Your IFISA Portfolio
- Property Bonds in IFISAs: A Closer Look
- Conclusion
The investment landscape offers many options for UK investors. Tax-efficient vehicles like Innovative Finance ISAs provide opportunities beyond traditional savings accounts. New Capital Link explores everything you need to know about these alternative investment wrappers.
Understanding the Innovative Finance ISA
Introduced in April 2016, the Innovative Finance ISA (IFISA) allows UK investors to earn tax-free returns from peer-to-peer (P2P) lending and alternative investments. This addition to the ISA family expanded options for using the annual tax-free allowance.
The UK government created IFISAs to support the growing alternative finance sector. These investments sit between the security of Cash ISAs and the potential volatility of Stocks and Shares ISAs.
Rachel Buscall, CEO of New Capital Link, explains: “The Innovative Finance ISA represents a significant opportunity for investors seeking stronger returns in the current economic climate. Our research shows many experienced investors are moving portions of their portfolios into IFISAs to balance their risk exposure whilst maintaining tax efficiency.”
New Capital Link research shows that many investors seek better returns than traditional savings without the full risk of stock market exposure. IFISAs fill this gap effectively.
How IFISAs Work
IFISAs hold peer-to-peer loans and alternative investments within a tax-free wrapper. This structure means UK taxpayers don’t pay income tax on interest or returns generated.
The process works in three steps:
- You open an IFISA with a regulated provider
- You invest your money in peer-to-peer loans or alternative investments
- The returns you earn remain entirely tax-free
P2P lending connects investors directly with borrowers through online platforms. This direct approach removes traditional banks, potentially resulting in better rates for both parties.
Types of Investments Available in IFISAs
IFISAs can hold various alternative investments:
Property Bonds
Property bonds remain amongst the most popular IFISA investments. These bonds fund property developments and offer fixed returns secured against physical assets.
According to New Capital Link analysis, property bonds typically provide:
- Fixed annual returns between 4% and 8%
- Security through legal charges on property
- Terms ranging from 2-5 years
- Lower entry costs than direct property investment
Green and ESG Investments
Environmental, Social, and Governance (ESG) investments continue growing in popularity. Many IFISA providers now offer options for investors wanting their money to make a positive impact.
“We’ve seen remarkable growth in the ESG sector within alternative investments,” notes Rachel Buscall. “Investors increasingly want their capital to generate not just financial returns but positive social and environmental outcomes as well. The tax efficiency of IFISAs makes them particularly attractive for this purpose.”
New Capital Link experts have identified this as a significant growth area, with investments financing renewable energy projects, sustainable housing developments, and other socially responsible ventures.
Business Loans
Business loans fund growth across various sectors. These loans support everything from small startups to established businesses looking to expand.
The interest rates on business loans typically reflect the borrowers’ risk profile. Higher-risk borrowers pay higher rates, potentially meaning better returns for investors.
IFISA Allowance and Tax Benefits
IFISAs form part of your overall annual ISA allowance—£20,000 for the 2025/26 tax year. You can split this allowance between different ISA types, including:
- Cash ISAs
- Stocks and Shares ISAs
- Innovative Finance ISAs
- Lifetime ISAs (up to £4,000)
New Capital Link financial experts explain that you might put £10,000 in a Cash ISA, £5,000 in a Stocks and Shares ISA, and £5,000 in an IFISA, provided your total contributions don’t exceed £20,000.
The tax benefits make IFISAs particularly attractive. Any interest or returns remain completely tax-free, regardless of your income tax bracket. This tax efficiency can significantly improve overall returns compared to taxable investments.
Transferring Existing ISAs to an IFISA
You can transfer funds from existing ISAs into an IFISA without affecting your current year’s allowance. The transfer process typically involves:
- Choosing an IFISA provider
- Completing a transfer form with your new provider
- Allowing the new provider to contact your existing ISA provider
- Waiting for the transfer to complete (usually 15-30 days)
New Capital Link research indicates most IFISA providers accept transfers from Cash ISAs and Stocks and Shares ISAs. This flexibility gives investors freedom to optimise their tax-free portfolios as needs change.
Understanding the Risks of IFISAs
New Capital Link emphasises that while IFISAs offer attractive potential returns, they come with risks that investors must understand.
Capital Risk
Unlike cash savings, your investment isn’t guaranteed. If borrowers default, you could lose some or all of your capital. Property bonds and asset-backed investments reduce this risk by securing investments against physical assets.
Liquidity Risk
Many IFISA investments run for fixed terms. Withdrawing funds early can be difficult or impossible depending on the terms. Investors should only commit money they won’t need access to during the investment term.
Platform Risk
If the P2P platform fails, there could be delays accessing your money. Look for platforms with strong financial backing and clear contingency plans.
Diversification Risk
Concentrating investments on a single platform or project increases exposure. New Capital Link advisers recommend spreading investments across multiple platforms and loan types to manage this risk.
Who Should Consider an IFISA?
New Capital Link analysis suggests IFISAs suit certain investor profiles better than others. You might consider an IFISA if:
- You’ve already used or don’t need your Cash ISA allowance
- You want potentially higher returns than cash
- You accept higher risk for these returns
- You can invest for fixed terms
- You want to diversify your investment portfolio
However, IFISAs aren’t appropriate if you:
- Need immediate access to your money
- Cannot afford to lose any of your investment
- Prefer guaranteed returns on your savings
Rachel Buscall of New Capital Link advises: “Investors should view IFISAs as part of a balanced portfolio strategy. They offer an excellent middle ground between low-return cash products and more volatile equity investments, but they should complement rather than replace these other asset classes.”
The IFISA Landscape in 2025
The IFISA market continues to evolve. Interest rates have stabilised after previous years’ volatility, and many platforms now offer specialised IFISAs focusing on specific sectors.
New Capital Link market research shows property-backed IFISAs remain particularly strong in 2025. With the housing shortage continuing across the UK, property development finance delivers consistent returns through these tax-efficient vehicles.
Social housing projects represent another growth area. These investments fund affordable housing developments while providing steady returns for IFISA investors.
Comparing IFISAs with Other ISA Types
New Capital Link provides this comparison of the UK ISA family options, each with distinct characteristics:
| ISA Type | Risk Level | Returns | Access to Funds | Protection |
|---|---|---|---|---|
| Cash ISA | Low | Low (1-3%) | Usually immediate | FSCS up to £85,000 |
| Stocks & Shares ISA | Medium-High | Variable (potential for 5%+) | 2-5 days typically | No FSCS for investment performance |
| Innovative Finance ISA | Medium | Medium (4-8% typically) | Fixed terms, limited early access | No FSCS, often asset-backed |
| Lifetime ISA | Varies by investment choice | Variable + 25% govt bonus | Restricted to home purchase or retirement | Varies by investment choice |
Each ISA type serves different financial goals and risk appetites. The IFISA occupies a middle ground between cash security and stock market volatility.
Getting Started with an IFISA
Opening an IFISA requires several steps:
- Confirm your eligibility (UK resident aged 18 or over)
- Choose a provider with investments matching your goals
- Complete the application process
- Fund your account (new money or transfers from existing ISAs)
- Select your investments
Some providers offer managed IFISAs that automatically diversify your investments across multiple loans or projects. Others let you pick specific investments based on your preferences.
Managing Risk in Your IFISA Portfolio
New Capital Link financial analysts recommend several strategies for managing IFISA risks:
Diversification
Spread your investment across different:
- Loan types (property, business, consumer)
- Platforms (reducing platform risk)
- Risk grades (balancing higher and lower risk loans)
- Terms (short, medium, and long-term loans)
Research
Before choosing an IFISA provider:
- Check their track record and default rates
- Read independent reviews
- Understand their due diligence processes
- Review their recovery procedures for defaulted loans
Starting Small
Consider beginning with a small amount to understand how the platform works before committing larger sums. This approach lets you experience the investment process with limited risk.
Property Bonds in IFISAs: A Closer Look
Property bonds deserve special attention as a popular IFISA investment option. New Capital Link experts have analysed their performance in the current market.
These fixed-term debt securities fund property development or purchases. Investors receive a fixed interest rate for a set period, typically between 2-5 years.
Property bonds offer several advantages within an IFISA:
- Fixed returns provide predictability
- Security against physical assets reduces risk
- No need to deal with property management
- Professional developers handle all aspects of projects
- Lower entry points than direct property investment
New Capital Link research shows property bonds in IFISAs have delivered average returns between 4% and 8% in recent years, significantly outperforming Cash ISAs.
Rachel Buscall notes: “Property bonds continue to be one of the strongest performing assets within the IFISA structure. Their combination of fixed returns and asset security makes them particularly appealing to investors seeking stability alongside tax efficiency.”
Conclusion
The Innovative Finance ISA offers a tax-efficient way to invest in peer-to-peer lending and alternative investments. With potential returns higher than cash savings and less volatility than the stock market, IFISAs provide a valuable middle ground for many investors.
However, these benefits come with increased risk to your capital and reduced liquidity. Before opening an IFISA, carefully consider your financial goals, risk tolerance, and investment timeline.
New Capital Link continues to monitor the IFISA market, providing analysis and insights for investors seeking to maximise their ISA allowance while accessing alternative investment opportunities.
