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Lifetime ISA vs Help to Buy ISA – what your clients need to know

by: Paloma Kubiak
  • 18/03/2016
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In a surprise move, the chancellor announced a new type of ISA in the Budget to help young people buy their first home and save for retirement at the same time. But with the Help to Buy ISA already available and the Lifetime ISA set to launch from April 2017, how do they compare for first time buyers?

As part of the Lifetime ISA available from 6 April 2017, adults under 40 will be able to save up to £4,000 each year where they’ll receive a government bonus of 25%, or £1,000 on top.

The  savings and bonus can only be used to buy a first home or for retirement.

While the scheme allows you to have both a Help to Buy ISA and a Lifetime ISA, you’ll only be able to use the government bonus from one of the accounts to buy your first home.

So which scheme is best for first time buyers?

Karena Woodall, a consultant at wealth management firm Mattioli Woods, sums up the schemes.

The Help to Buy ISA is still in its infancy, but around 250,000 homebuyers have opened an account since their introduction in December last year. The plan is restricted to £200 per month, although in the first month you can make an initial payment of £1,000. The government bonus, a maximum of £3,000, is paid when the policy holder buys their first home.

“It is however available now and for savers aged 16 or over and there’s also no minimum age for the homebuyer so older savers will still qualify” Woodall says. The government bonus can be claimed at any time, subject to saving a minimum of £1,600 where the government will add a bonus amount of £400. The Help to Buy ISA will be available for new savers until 30 November 2019.

The new Lifetime ISA isn’t going to be available until 2017 and will have a maximum investment of £4,000 per year with the bonus paid at the end of each tax year. Woodall says this means the plan holder benefits from ‘tax-free growth’ on the bonus from the time it is added. “The bonus is added annually, regardless of the frequency of payments into the plan, although the bonus can be paid earlier if an individual is purchasing a home” she adds.

Plans can be taken out from the age of 18 and contributions can continue until age 50 which means over the term, savers could potentially contribute up to £128,000 matched by a maximum government bonus of £32,000 (based on a 32-year period from 18 to 50). However the plan needs to be in place for 12 months before withdrawals can be made for a home purchase.

You can elect to transfer the Help to Buy ISA into the Lifetime ISA or continue both, but you’ll only be able to use the bonus from one to buy your first home.

Both the Help to Buy and Lifetime ISA require the buyer to live in the home and it can’t be used for buy to let purposes. The limit for the Help to Buy ISA is on property valued at £450,000 or less in London and £250,000 or less in all other parts of the UK, whereas the Lifetime ISA has a single property limit of £450,000.

During the 2017/18 tax year only, those who have a Help to Buy ISA will be able to transfer the funds into a Lifetime ISA and receive the government bonus on those savings.

“People looking to purchase a home before April 2018 may be best placed retaining the Help to Buy ISA and starting the Lifetime ISA in conjunction with or after the first house purchase has been made” Woodall adds.

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