The Help to Buy ISA was introduced in December 2015 and was aimed at helping first-time buyers save towards the purchase of a home. The government contributes £50 for every £200 put into the ISA up to a maximum of £15,000 (including the government’s share). As such it offers a relatively easy and tax-free form of helping first-time buyers build a deposit.
The option to open a Help to Buy ISA will end on 30 November 2019. For anyone who one day may want to buy a home, this represents the last chance to open such an ISA, with the ability to continue saving in it until 2029.
The Help to Buy ISA must be opened before 1 December 2019 for an individual to be eligible for the 25% government top-up for any savings made into the ISA up until 2029. A Help to Buy ISA can be opened by anyone aged 16 or over for as little as £1, and anyone can contribute to it, including family and friends. So even if an individual is unsure if they will buy a home, opening one by 30 November 2019 ensures the opportunity offered by the Help to Buy ISA is not lost.
If a Help to Buy ISA is opened by 30 November 2019, then those who can afford to invest the maximum deposit of £1,000 should consider doing so since this extra allowance is only available for the first month. Thereafter the maximum that can saved each month is £200.
An alternative to the Help to Buy ISA for first-time buyers is the Lifetime ISA. It is intended to be a longer-term tax-free savings account which also offers savers a 25% bonus on the amount they put into their account. There are different conditions attached to the different ISAs, so when choosing between the two savers will need to consider these differences. The main differences between the two ISAs are considered below.
It is possible for an individual to have both a Help to Buy ISA and a Lifetime ISA, but they would only be able to receive the 25% homebuyers’ bonus on one of the ISAs. Whilst a Help to Buy ISA can be opened by anyone aged 16 and over, with no upper age limit, a lifetime ISA can only be opened if you are aged 18 to 39 and savings can only be made into a Lifetime ISA until the saver reaches 50. The Lifetime ISA can remain open after the saver reaches the age of 50, continuing to earn interest tax-free on the balance.
The Lifetime ISA allows for up to £4,000 per tax year to be paid in, to which the government will then add a 25% bonus up to a maximum of £1,000 per year, paid on a monthly basis. So over a longer period it offers the potential for a bigger bonus contribution (by comparison the Help to Buy ISA is limited to a maximum of £2,400 saving per tax year up to a maximum balance of £15,000).
The Lifetime ISA can be used by a first-time buyer towards the purchase of a property valued up to £450,000, whilst the Help to Buy ISA has a property limit of £250,000 (or £450,000 in London).
The Help to Buy ISA on the other hand can trigger the 25% bonus sooner, as quickly as 3 months after opening, but the bonus on the Lifetime ISA can only be used if the account has been open for at least a year before the property is purchased. So for those undecided individuals who may want the option of a Lifetime ISA in the future, opening an account with just a £1 now starts the 12 month clock straight away.
There is no withdrawal penalty associated with a Help to Buy ISA, so funds can be removed whenever the saver wants, but with a Lifetime ISA there is an effective 6.25% penalty for withdrawing funds for anything other than the purchase of a new home (or retirement when aged 60) as well as losing the 25% government bonus.
As with other ISA’s no tax will be payable on any interest, income or capital gains from cash or investments held within a Help to Buy ISA or a Lifetime ISA. However, there is the restriction that you generally cannot contribute to a cash ISA and a Help to Buy ISA in the same tax year, and also any contributions into a Help to Buy ISA or Lifetime ISA will form part of your annual ISA limit.
If you have any questions regarding the points raised above or would like further information on the rules surrounding Help to Buy ISAs or Lifetime ISAs please contact our Assistant Tax Manager, Jamie Poulton.
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