Use this Isa loop­hole now for a £1,100 sav­ings boost

The Daily Telegraph - Your Money - - FRONT PAGE -

Savers could miss out on a 25pc gov­ern­ment bonus if they don’t act be­fore the end of the tax year, says Emma Lunn

Savers have just four months to take ad­van­tage of a loop­hole that pro­vides an ex­tra £1,100 boost to Isa sav­ings. Peo­ple sav­ing for a home in a Help to Buy Isa can boost their pot by trans­fer­ring to the new Life­time Isa be­fore April 5 next year, and ben­e­fit from a 25pc Gov­ern­ment top-up, while those who de­lay will miss out.

The loop­hole is down to pol­icy small print about money trans­ferred from Help to Buy Isas that was saved be­fore the Life­time Isa was launched on April 6 2017.

The max­i­mum amount that can be saved into a Life­time Isa is £4,000 a year, in­clud­ing any trans­fers. How­ever, Help to Buy Isa money can be trans­ferred in the first 12 months Life­time Isas are avail­able with­out count­ing to­wards the con­tri­bu­tion limit for the 2017-18 tax year.

Sarah Coles, of bro­ker Har­g­reaves Lans­down, said: “If you opened a Help to Buy Isa be­fore the launch of the Life­time Isa, you can take ad­van­tage of spe­cial rules and get the Gov­ern­ment to boost your fund by hun­dreds of pounds when you trans­fer it to a Life­time Isa.

“You can trans­fer from a Help to Buy Isa into a Life­time Isa af­ter April 2018, but it will eat up your an­nual Life­time Isa al­lowance, and you’ll miss out on the ex­tra boost from the Gov­ern­ment, so it’s worth get­ting in ahead of the dead­line.”

The fol­low­ing ex­am­ple shows how the loop­hole works.

Let’s say you had saved into a Help to Buy Isa be­fore April 2017. The max­i­mum you could have saved is £4,400. If you trans­fer this to a Life­time Isa be­fore April next year, it will not use any of your al­lowance for the year. This means you could con­trib­ute a fur­ther £4,000. In April you’d get the 25pc bonus on the en­tire £8,400 – that’s £2,100.

How­ever, if it was any other year, your trans­fer would use your en­tire Life­time Isa al­lowance and you’d re­ceive a bonus of just £1,000.

First-time buy­ers can use either a Help to Buy Isa or Life­time Isa, but each have dif­fer­ent rules and ben­e­fits.

Both Isas pro­vide a tax-ef­fi­cient way for first-time buy­ers to save for a prop­erty pur­chase and both pro­vide a 25pc Gov­ern­ment bonus on your money. Olivia Wil­son, 18, was one of the first Life­time Isa in­vestors in the coun­try when it was launched in April. She is open­ing the new Isa prod­uct in or­der to save for a house.

Any­one sav­ing into a Life­time Isa needs to know it comes with a harsh exit penalty if you want to use the money for any­thing other than buy­ing a house or re­tire­ment (see box).

What to do when you buy prop­erty

To be el­i­gi­ble for the gov­ern­ment bonus, the cash in a Help to Buy Isa must be used to buy a home up to the value of £250,000 out­side Lon­don, or up to £450,000 in the cap­i­tal. The Life­time Isa has a cap of £450,000 wher­ever you buy.

In both cases, you must be a gen­uine first-time buyer and not have owned a prop­erty or part of a prop­erty be­fore, either in the UK or over­seas. You also can­not buy a prop­erty with the in­ten­tion to let it out. How­ever, you can buy a prop­erty with a part­ner and pool both your pots, in­clud­ing Gov­ern­ment

bonuses. The money in a Life­time Isa can also be taken out and used to fund your re­tire­ment af­ter the age of 60. But it comes with harsh penal­ties if you don’t use it to buy your first home and don’t wait un­til you’re 60 to with­draw the money.

From April 2018 a 25pc exit charge will be ap­plied – this penalty ap­plies to the to­tal value of the pot at the time of with­drawal, not just bonus funds.

This means the Gov­ern­ment could take back more than it con­trib­uted with crit­ics call­ing this a “tax on in­vest­ment growth”. First, any­one over the age of 40 can­not use a Life­time Isa, as only those over 18 and un­der 40 can open one. If you’re over 40 you’ll need to use a Help to Buy Isa.

If you hold a Help to Buy Isa, you can save £1,200 in the first month and then up to £200 a month af­ter that. This to­tals £3,400 in year one, with an £850 Gov­ern­ment bonus, and in sub­se­quent years £2,400 plus £600. The max­i­mum the Gov­ern­ment will add is £3,000 (on £12,000 of sav­ings).

The Life­time Isa is more gen­er­ous. You can save up to £4,000 and re­ceive up to £1,000 bonus each year. The £4,000 an­nual limit can be paid in as a lump sum on day one of the tax year, as­sum­ing you have the money to hand.

Savers are el­i­gi­ble for the Life­time Isa bonus ev­ery year be­tween the ages of 18 and 50 – a po­ten­tial £32,000 from the Gov­ern­ment (on £128,000 sav­ings).

To qual­ify for the bonus, cash in a Help to Buy Isa must be used to buy a first prop­erty while money in a Life­time Isa can be used for a first home or to sup­ple­ment re­tire­ment in­come af­ter the age of 60.

“You are al­lowed to open both of th­ese Isas. How­ever, crit­i­cally, you can only use the bonus from one of them to buy your first home,” said Tom Adams, head of re­search at sav­ings ad­vice firm Sav­ings Cham­pion.

“How­ever, you could use the Help to Buy Isa for your first home and keep your Life­time Isa un­til you are 60 or over and en­joy the bonus from this to sup­ple­ment your re­tire­ment in­come.”

It’s im­por­tant to note that sav­ing in a Help to Buy Isa re­stricts you from

The Help to Buy Isa is purely a cash prod­uct while Life­time Isas can either be cash or in­vested in stock mar­kets, for those putting the money away for longer.

If you are stick­ing to cash there are far more op­tions and bet­ter rates for Help to Buy Isas. The best pay­ing ac­count is from New­cas­tle Build­ing So­ci­ety and pays 2.3pc.

In con­trast, there’s only one cash Life­time Isa avail­able, from Skip­ton Build­ing So­ci­ety pay­ing a pal­try 0.5pc in­ter­est.

There’s also min­i­mal choice for those want­ing to in­vest the money, with just four providers: brokers Har­g­reaves Lans­down, the Share Cen­tre and A J Bell, and Nut­meg.

With a Life­time Isa you can save up to £4,000 and re­ceive up to a £1,000 bonus

A Life­time Isa has to be held for 12 months be­fore it can be used to­wards buy­ing a home, whereas the Help to Buy Isa just re­quires you to have de­posited £1,600 – which you can ac­cu­mu­late within three months.

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