Savers with a Help to Buy ISA only have A WEEK LEFT to take advantage of a loophole that can provide a tax-free boost of up to £2,000.
To be eligible, you have to have:
- Opened a Help to Buy (HTB) ISA before 5 April 2017
- Opened a Lifetime ISA (LISA) between 6 April 2017 and 5 April 2018
What is the Help To Buy ISA?
The Help to Buy ISA is an ISA launched in 2015 aimed at making the purchase of first homes easier for those over 16 years old. Payments into the ISA must be made monthly with a maximum contribution of £200 a month, amounting to £2,400 a year. (£3,400 in the first year it’s opened).
The government tops up your savings by adding 25% of the value of your savings. To get this 25% bonus, you will need to have at least £1,600 in your HTB ISA. Additionally, once the government bonus reaches £3,000 (meaning you’ve saved £12,000), you won’t get any more but you can carrying on saving in the HTB ISA until November 2029. The ISA gains tax-free interest like any other ISA. The bonus is not paid on the interest gained, only on your contributions.
The purchase price of the home you buy can’t exceed £250,000 outside of London and £450,000 in London.
The catch with the HTB ISA is that you won’t be able to get the 25% government bonus during the exchange part of buying a home. This is the part in the process where the seller may require you to put down a 5-10% deposit to secure the property. You would receive the 25% bonus upon completion of the sale.
On the flip side, if you decide not to buy a home, you can withdraw your money from the HTB ISA, albeit bonus-free but you won’t be charged.
There are currently numerous HTB ISA providers with competitive interest rates. The HTB ISA is only available to be held as a cash ISA.
What is the Lifetime ISA?
The Lifetime ISA is an ISA that can only be used for two reasons: to buy your first home or to save for retirement. To open a Lifetime ISA, you must be between the ages of 18 and 40. The maximum contribution to a LISA in a tax year is £4,000, which you can pay in gradually or all at once.
The government also tops up your savings by adding a 25% bonus (similar to the HTB ISA). The difference is the first bonus is added in April 2018 and then paid into your LISA monthly.
The ISA gains tax-free interest like any other ISA. Current LISA interest rates are currently quite poor. The bonus is not paid on the interest gained, only on your contributions. The maximum bonus you can gain is £32,000 (if you open a LISA at 18 and add the maximum yearly contribution till you’re 50).
The purchase price of the home you buy can’t exceed £450,000 in the UK. You also need to have the LISA for a year before you can use it to buy a home.
On the flip side, if you decide not to buy a property and don’t want to keep the LISA till retirement, you will pay a 25% withdrawal penalty (unless you are terminally ill or pass away). We calculated you get less than what you put in if you withdraw early (even with the 25% government bonus added).
The LISA can be held as a cash LISA or stocks and shares LISA.
So what’s the loophole?
The value that your HTB ISA was on the 5 April 2017 can be transferred into the LISA before 5 April 2018. It won’t affect your £4,000 LISA allowance for the 2017-2018 tax year
If you transfer on or after 6 April 2018, it will make up part of the £4,000 LISA allowance for 2018-2019 and you won’t get the extra boost. Additionally transfers from a stocks and shares ISA or a cash ISA will count towards your annual LISA limit even if it’s done before April 2018.
Example 1 (based on the maximum contribution):
Tobi opened a HTB ISA when it was first launched in 2015. By 5 April 2017, she had saved the maximum she could have of £4,400. She opens a LISA between 6 April 2017 and 5 April 2018. She transfers the £4,400 from the HTB ISA to the LISA before 5 April 2018. She also pays in the maximum allowance of £4,000 for the year into the LISA before 5 April 2018. In April/May 2018, the government will pay in 25% on the total amount.
Tobi’s total contribution: £8,400
The government’s 25% contribution in April 2018: £2,100
New total LISA balance: £10,500
And we haven’t even added the amount of interest she has gained.
If Tobi is planning to buy a first home in 2 or more years, this may be worth it (as you need to have a LISA for 1 year before buying)
Example 2 (based on the minimum contribution):
Leena has saved the minimum of £1,600 in her HTB ISA needed to get the HTB 25% bonus. She opens a LISA between 6 April 2017 and 5 April 2018. She transfers the £1,600 from the HTB ISA to the LISA before 5 April 2018. She pays in the minimum of £1 into the LISA.
Leena’s total contribution: £1,601
The government’s 25% contribution in April 2018: £400.25
New total LISA balance: £2,001.25
Leena would receive £400 at the point of completion of home purchase if her HTB ISA balance remains the same and she doesn’t transfer into the LISA. By transferring in, she is receiving the bonus now instead of at completion. The LISA will be less flexible but has a higher maximum contribution.
Current LISA providers:
Skipton Building Society – The only provider with a cash LISA. To take advantage of this loophole you need to have started a transfer of your HTB ISA by 11.59pm on the 1st of March 2018.
Stocks and shares LISAs*:
Hargreaves Lansdown – You can hold cash in this stocks and shares LISA
Nutmeg – You can’t transfer in your HTB ISA to Nutmeg’s LISA.
The Share Centre – The deadline to transfer your HTB ISA is the 29th of March 2018.
*Your capital is at risk with stocks and shares LISAs so you may get less than what you invested in.
If you are definitely buying a home within a year, we suggest getting professional financial advice before proceeding to take advantage of this loophole as you need to have held a LISA for one year and may not make it in time to take advantage of the loophole.
This post was written by Joy
Glossary of terms
ISA – Individual Savings Account – A tax-free wrapper for savings and investments. With other savings accounts, you may have to pay income tax on the interest you earn. With an ISA you would not.
Tax year – A UK tax year runs from the 6th of April of one year to the 5th of April of the next year. The tax year 2017/2018 would start on the 6th of April 2017 and end on the 5th of April 2018