The remit of the so-called peer-to-peer Isa has been extended to include crowdfunding debt.
From 1 November, investors in the Innovative Finance Isa can put their money in “crowd bonds”, where investors lend to UK businesses to get a return.
These debt securities are not listed but they are able to be traded to provide liquidity, unlike the simple peer-to-peer loans.
HM Treasury confirmed back in August that crowdfunding debt would be included in the new tax wrapper, which launched in April this year.
By investing in bonds, which are secured against a firm's operational assets, the investments are arguably lower risk than unsecured loans, according to Julia Groves, partner of investment firm Downing Crowd.
“It's the potential returns that really set the Innovative Finance Isa apart,” said Ms Groves, pointing out that investors can typically make a 4 to 6 per cent return if they are happy to take on more risk.
This is compared to the 0.5 per cent return offered by many cash Isas.
Crowd bonds are arguably less complex and risky than stocks and shares.Julia GrovesMs Groves said crowd bonds could become a popular addition to the new Isa, as many investors look to diversify their portfolios.
“It's true that a lack of understanding among investors often sees different types of crowdfunding lumped together as being too risky.
“But crowd bonds are actually a very simple form of lending that is, arguably in many ways, less complex and risky than stocks and shares, particularly when you consider the amount that events, such as Brexit for example, can wipe off markets.”
Debt crowdfunding differs from equity crowdfunding, which involves businesses which are at an earlier stage and are normally not in a position to offer security and pay returns immediately.
Wendy Cochran, independent financial adviser at Dalbeath Financial Planning, said: "We would recommend that savers watch these from the sidelines for a year or two to see how much return they deliver, and what risks they run, as these are very new forms of saving."
