Amongst the less remarked upon changes to ISAs in this year’s Autumn Statement was the expansion of investments that can be held in an innovative finance ISA. Here we explain what they are and the changes announced.

From April 2024, investors will be able to hold Long-Term Asset Funds (LTAFs) and Property Authorised Investment Funds (PAIFs) in innovative finance ISAs (IFISAs). This is in addition to peer-to-peer loans.

Innovate Finance ISAs were introduced back in 2016 to encourage tax-free investment in peer-to-peer finance, including crowdfunding. They work in the same way as cash and stocks and shares ISAs, with the same £20,000 annual allowance.

In this article, we cover:

Read more: How Jeremy Hunt’s Autumn Statement will affect you

What is an innovative finance ISA?

An innovative finance ISA is one of a number of different ISAs that you can choose to save or invest your money. Rather than cash or stocks, you can invest in peer-to-peer loans, with all the tax-free benefits you expect from an ISA.

But unlike a cash ISA, IFISAs are not covered by the Financial Services Compensation Scheme. This means that your capital could be at risk if a firm goes bankrupt or a borrower refuses to repay a loan.

While IFISAs provide an alternative option, they have far from revolutionised the ISA world. They remain a tiny fraction of the whole ISA market.

In the 2021/22 tax year, HMRC figures show there were only subscriptions into 17,000 IFISAs. In comparison, there were 3.9 million stocks and shares ISAs and 7.1 million cash ISAs.

What are Long Term Asset Funds and Property Authorised Investment Funds?

You would not be alone if you had no idea what an LTAF or PAIF is. Here we explain the two:

Long term asset funds

An LTAF is a type of fund that provides a way for you to invest in long term illiquid assets. These can include infrastructure, real estate and private equity.

LTAFs have previously been excluded from ISAs because assets must have the ability to be sold within a 30-day window.

The government hopes that in opening this type of investment up to ISA investors, it will increase funding for long-term project which can invigorate the economy.

Property authorised investment funds

PAIFs are open-ended property funds that invest in either real property or the shares of UK Real Estate Investment Trusts (REITs).

Read more: Guide to property investment

Will the changes benefit savers?

Tom Selby questioned what some of these new investments will offer savers. “While Long-Term Asset Funds (LTAFs) may work for institutional pension investors, it is hard to see the case for making them available to ISA customers.

“We are talking here about an illiquid investment potentially being promoted in a world where people choose the product specifically because of the flexibility it provides.

“While any investment should, of course, ideally be long-term, life often gets in the way of people’s best-laid plans. Any investor considering investing in illiquid assets such as LTAFs through their ISA needs to fully understand what they are getting into and the associated risks,” he added.

Are IFISAs a good option? The expert view

Susannah Streeter, head of money and markets at Hargreaves Lansdown is more pragmatic.

“They could be appropriate for a small proportion of portfolios where the investment horizon is aligned to that of long-term asset fund. This could both to increase diversification in a portfolio, and to potentially increase growth from investments that are traditionally hard to access. 

“However, these assets are potentially riskier, and the risks must be well flagged.”

But as far as holding property funds in an innovative finance ISA was concerned, Streeter says there are other, more appropriate options already open to investors.

“We don’t think these are the way to invest in property because of liquidity concerns. We think closed ended funds are a better way to get pooled exposure, and these are already available through an ISA.”

Read more: What is a pension pot for life and how would it work?