Innovative Finance ISAs (IFISAs) Explained

Alongside the familiar Cash and Stocks & Shares ISAs, there is a little-known option: the Innovative Finance ISA (IFISA). These accounts let you lend money through peer-to-peer platforms or crowdfunding projects and keep the interest tax-free. While the tax treatment is the same as other ISAs, the risks are very different.

What is an Innovative Finance ISA?

An IFISA is a tax-free wrapper introduced in 2016 to encourage alternative finance. Instead of earning interest from a bank, you lend money directly to individuals, small businesses, or property developers via FCA-regulated peer-to-peer platforms.

Any interest or gains stay free from income and capital gains tax, provided you remain within your £20,000 annual ISA allowance.

Why it matters: Interest income is normally taxed at higher rates than dividends or capital gains. From a tax-efficiency perspective, if you want to shield interest-bearing assets, the IFISA structure can be powerful. But it also means you’re taking on risks very different from savings accounts or equity investments.

Caveat: Unlike Cash ISAs, IFISAs are not protected by the Financial Services Compensation Scheme (FSCS). If borrowers fail to repay, or if the platform itself collapses, your money is at risk.

How IFISAs work

When you invest through an IFISA, you are effectively the lender:

• Your money is matched with borrowers by the platform.
• Borrowers repay capital and interest over a fixed term.
• Returns depend on their repayment, not on market growth.

Some platforms advertise “target rates” of 7–8%. These are averages. Some loans may pay closer to 9%, while others default and return far less.

Example: Lend £1,000 through a property-backed IFISA with a 7% target return. If all borrowers repay, you might receive £70 interest in a year, tax-free. But if one loan defaults and takes years to recover in administration, your actual return could be much lower. Defaults are not rare, and recoveries can be slow, sometimes extending beyond the original loan term.

Risks and protections

The risks with IFISAs go beyond simple borrower default:

• Default risk: Borrowers may not repay. Recovery can drag on for years if administrators or courts are involved.
• Liquidity risk: IFISA loans are often illiquid. Some platforms offer a “secondary market” to sell loans early, but volumes are shallow, discounts steep, and there is no guarantee of sale.
• Platform risk: You are exposed not just to the borrower but also the health of the platform. If the platform fails, your loans may be frozen or impaired.
• Systemic exits: Many early providers exited the market entirely.
• No FSCS cover: Unlike bank accounts, there is no government-backed safety net.

Some platforms advertise “provision funds” that cover defaults, but these are discretionary, not guaranteed. The FCA has repeatedly warned that IFISAs are not suitable as a foundation for most household finances.

Case study: when things go wrong

The risks are not just theoretical. A prominent example is Lendy, once one of the UK’s largest peer-to-peer property lenders. At its peak, it had over £160 million of active loans. It collapsed in 2019, leaving investors facing heavy losses and years-long recoveries.

Other well-known providers have also exited the market:

• Funding Circle – Launched in 2010 and for years billed as the flagship of UK peer-to-peer lending. By 2019 it had facilitated more than £5 billion of small business loans. But performance was mixed, with rising defaults and weaker returns for retail investors. In 2019 it announced the closure of its platform to individuals, shifting its focus entirely to institutional money.
• Zopa – One of the pioneers, founded in 2005 and often credited with inventing the peer-to-peer model. It lent more than £5 billion over its lifetime to hundreds of thousands of UK borrowers. By the late 2010s it sought more stability and scale, winning a UK banking licence in 2020 and rebranding as a digital bank. Its peer-to-peer lending arm was wound down and all retail investments repaid.
• Ratesetter – Another large platform, once marketing itself heavily with provision funds and more predictable returns. At its peak it had more than £4 billion of outstanding loans and over 750,000 retail investors. In 2020 Metro Bank acquired it, but only for its lending infrastructure. The peer-to-peer investment side was closed in 2021 and savers were paid back gradually.

Each of these platforms had substantial scale, brand recognition, and thousands of retail investors. Their exits show that the challenges of credit risk, platform economics, and regulation were not confined to fringe players. Even market leaders with billions under management concluded that retail P2P lending was not sustainable.

Examples of IFISA providers

Despite setbacks, some platforms remain active. These examples are for illustration only, not recommendations:

• Kuflink – Property-backed lending, with target returns around 5–9%. Loans are typically secured against property.
• CrowdProperty – Specialises in small property development projects, funding housing supply. Target returns mid-single digits.
• easyMoney – Offers loans secured on property, with risk bands and target returns above standard savings rates.

Each has its own risk profile and liquidity rules. Read the small print carefully.

Market availability

The IFISA market has contracted sharply. Many platforms have exited, while a handful continue.

HMRC statistics for 2023 show:

• Around 20,000 active IFISA accounts, compared with:
  • 11 million Cash ISAs
  • 4 million Stocks & Shares ISAs

That puts IFISAs at well under 1% of the market.

Who are IFISAs for?

For most people, IFISAs are not the right foundation. They do not match the milestones people usually save towards – emergency funds, first homes, or retirement. But for investors who already have those bases covered, IFISAs can be a way to take on different risks in pursuit of higher fixed-income style returns.

They may suit:

• Experienced investors with diversified portfolios.
• People specifically seeking exposure to alternative credit.
• Those wanting to shelter interest-bearing assets from higher-rate tax.

Example use case: An investor with a large Stocks & Shares ISA for long-term growth, and cash savings for liquidity, might allocate 5% of their allowance to an IFISA for diversification. For beginners, they are rarely the right choice.

Comparing IFISAs to other ISAs

Conclusion

IFISAs are niche. They can deliver higher tax-free returns than cash, but the risks are unusual and substantial. Defaults can take years to resolve, secondary markets are shallow, and entire platforms have collapsed.

They are not a substitute for Cash or Stocks & Shares ISAs, which remain the foundation for most savers. At best, they are a diversifier for experienced, risk-tolerant investors who understand they could lose money.

The next post in this series will put all ISA types side by side in one comparison.