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