IFISA Guide

IFISAs (Innovative Finance Individual Savings Accounts) were launched in 2016 as a way of providing the tax benefits of ISAs to the burgeoning crowdfunding sector. Loan-based crowdfunding (aka peer-2-peer lending) allows individuals to directly lend money to other individuals, companies, or organisations in return for financial rewards, such as interest payments. This method of investing allows individuals to know more precisely who they are giving money to and where this money will be spent. This is unlike investing in investment trusts or funds, who invest in a range of companies and financial products. For the green investor, crowdfunding’s targeted approach can ensure your money is directed at the industry you want to invest in. However, not all IFISA products are green-focused, other areas include property and business loans.

IFISAs and Platforms

As the name suggests IFISAs are a form of ISA (Individual Savings Account) and operate in a similar manner to ‘Stocks & Shares ISAs’ and ‘Cash ISAs’. ISAs allow a certain value of approved investments to be made each financial year, on which no tax is paid. The approved peer-2-peer products (such as green bonds) which are placed within an IFISA are tax free. That is, no tax will be paid on the their purchase or any interest earned. As with all ISA products the total amount that can be invested across all you different ISAs in given tax year is fixed by the tax-free saving allowance. Currently this is £20,000. See our ISA Guide for more details.

For example in a given tax-year you could split your ISA investments between Cash ISAs, Stocks and Shares ISAs and IFISAs, as long as your total ISA investment does not exceed £20,000 (Note: you don’t have to use your whole allowance).

To invest in IFISA products, you must open an account with an online provider (i.e. IFISA platform). You are then able to invest in the IFISA products on that specific platform. See our IFISA platform guide for more details on green IFISA providers.

One major drawback of IFISAs is that you can only invest in the products on that platform. This is unlike stocks & shares ISAs where you can invest in the same product from multiple different platforms. You are also only able to open one IFISA per tax year. Therefore, if you want to invest in multiple IFISA products across multiple platforms then you must wait until the next tax year to open another IFISA.

It is also worth noting that these platforms also offer non-eligible IFISA products. There are tax implications of these investments, the details of which are beyond the scope of this article.

How Green are IFISA Eligible Products?

This very much depends on the project or company.

In some cases your investment will go directly to the procurement, building and construction of green infrastructure. For example, this could include:

• The purchase of equipment (solar panels, wind turbines, biodigesters)
• The purchase of land
• Construction costs
• Installation costs (connecting the equipment to the electricity grid)

In other cases it is not so clear cut. Many companies use IFISA bonds to refinance existing projects. This is when a company has used more expensive debt (e.g. bonds with a higher interest rate) to build the renewable project in the first place. They then return to the bond market to issue another bond to pay off some of the original debt. In many cases this second round of funding is pre-planned at the start of the project. In the intervening time the renewable asset has been built and is generating revenue, helping to pay off the original debt too. It is up to you whether you believe investing in this manner would be considered green or not.

Another potential issue is ‘greenwashing’. This is when an investment is advertised as greener than you think. For example, a company issues a bond for a recycling centre but does not explain as clearly as they could that much of the waste processed at their facility ends up in a landfill. See our guide on what constitutes a green investment for more analysis of this issue.

Risks

IFISAs are considered higher risk investments that other ISAs (cash, stocks & shares etc.). This is due to several factors:

• They are a new type of investment and have not been stress tested in the same way as other investments.
• The quoted interest rate is only the expected rate. For example, the company issuing the bond may lower the interest rate in response to factors that affect their ability to generate sufficient revenue; for example, changing government strategy or subsidies.
• During the term of the bond the company may become insolvent and may not be able to repay the total value of the bond (the principle) when the bond term ends.
• In many cases your investment will be inaccessible for a significant period of time (several years plus). Therefore, you are unable to move your money if you need the cash or wish to re-organise your investment portfolio. There are exceptions such as instant access bonds, but these are not the norm.

Another factor to consider is that IFISA bonds are not currently covered by the Financial Savings Compensation Scheme, even though IFISA platforms must be approved by the Financial Conduct Authority (FCA).

Summary

IFISAs are a new and potentially radical way of investing directly in green products. Enabling your money to be directed towards the projects you want. But this immaturity can also count against them and they are not without financial risks (for example, lower than expected returns) or ethical risks (for example, money is not spent as advertised). However, that is not a reason to dismiss their potential as a way of democratising investing and allowing you to direct your money where you want it to go.