What are ISAs?
An Individual Saving Account (ISA) is a tax-free way to invest or save and it qualifies for a favorable tax status and payments into this account are made from after-tax income. UK Government does not charge any sort of income tax or capital gains tax on the investment returns i.e. you keep all the interest you earn on it.
ISAs were introduced in the year 1999 and were a replacement of Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). Stocks and Shares ISAs replaced Personal Equity Funds whereas Cash ISAs replaced TESSAs. There are basically six types of ISAs available, although not all are available nationwide, such as:
- Cash ISAs
- Junior ISAs
- Stocks and Shares ISAs
- Lifetime ISAs
- Help to Buy ISAs
- Innovative Finance
What is the Limit of ISA Allowance?
ISA allowance i.e. the maximum limit you can save in it, changes every tax year i.e. from April to April. The amount allowed, can be saved either in cash ISA, a stocks and shares ISA, an innovative finance ISA, a Help to Buy ISA, a Lifetime ISA or a combination of all of them.
Whether you invest or save in one or all, you should and must do that by 5th April for it to count in that tax year. Sadly, any unused allowance from previous tax-year does not roll over to the next one which means that if you don’t use it, you lose it forever.
For the year 2017/18, ISA Allowance is £20,000.
What are Flexible and Non-Flexible ISAs?
Your ISA is a flexible one, in case you can take out money from our ISA account and return it in the same tax year, i.e. by 5th April of that year without it reducing your current year’s ISA allowance. However, if the money returned in your ISA account reduces your allowance for that particular tax year, then your ISA is not a flexible one. However, point to remember here is that for an ISA to be a flexible one, providers don’t have to add/delete any feature. It’s a function of some of the ISAs and apart from Cash ISAs, there are certain other ISAs which are flexible like Innovative Finance ISAs and Stocks & Shares ISA can be a flexible one whereas Junior ISAs, Lifetime ISAs, Help to Buy ISAs can’t be a flexible ISAs. ISA flexibility came into effect on 06th April 2016.
Example of a Flexible ISA:
Alice has £40,000 in his cash ISA which is made up of £35,000 from previous years and £5,000 from money deposited in the current tax year, meaning he can still put £15,000 in of this year's allowance. If he withdraws £10,000 he can put in a further £25,000 in this tax year: the £10,000 he took out, plus the remaining £15,000 allowance.
What is Help to Buy ISAs?
UK Government has created various Help to Buy Schemes like Help to Buy by shared ownership, Help to Buy by Equity Loan and Help to Buy ISAs.
Help to Buy ISAs is a government programme in the United Kingdom which was introduced to help those who are planning to buy their first home. It was introduced in 2013 Budget Speech as an extension of the existing programme called FirstBuy, which was also aimed to help first time buyers. By doing so, it was assumed that the demand for the new-build houses will increase which in turn will increase the supply side of the housing market. In other words, it was designed/introduced to reward those who are saving for their first home.
So, if you have opened a Help to Buy ISA account for buying your first house, government will boost your savings by 25% i.e. for every £200 you save in your account, you will receive a bonus of £250 on it. The maximum bonus you can expect from the government for your Help to Buy ISA is £3,000 whereas the minimum bonus amount is £400 which means that at any point of time, you should have a minimum saving of £1,600 in your Help to Buy ISA account.
Who All Can Open Help to Buy ISA Account?
Anyone, who is above 16 years of age and intend to buy a house for himself, whether in the near future or few years down the line can open a Help to Buy ISA account. It is known to all that with new government new policies and changes to the existing one kicks in, however as per the current policy for Help to Buy ISA is that you can open your account until December 2019 and continue to save in it until December 2029 and bonus will be earned on your deposit in it by December 2030.
However, you must ensure your eligibility before you opt for this particular scheme, which is – you have never owned any home/house on your name ever in your life, whether bought or inherited, whether inside UK or outside UK. The government bonus is available on home purchases of up to £250,000.
Help to Buy ISAs are designed for individuals i.e. in case you are married and both of you intend to buy your first house, then you both can open your individual Help to Buy ISAs account where you both can save minimum of £400 in your respective accounts and earn the bonus, which will be double for your household.
For UK Residents, eligibility criteria to open the Help to Buy ISA account are:
- You should be at least 16 years of age.
- You must not have owned any property on your name anywhere in the world.
- You intend to buy a property worth value £250,000 or up to £450,000 in London.
- You are buying the property with the intention to live there, rather than to put it on rent.
For those who are not a resident of UK, can still open a Help to Buy ISA account if you are married to , or in a civil partnership with the person who qualifies for the above criteria.
How to Open and Manage the Account?
You can open Help to Buy ISA account in your bank branch, either by phone or online.
To open this account, you will need to:
- Open the account in your sole name
- Open the account with between £1 and £1,200.
- Ensure that the funds are received within 21 days of account opening.
You can take help of following providers in opening a Help to Buy ISA account:
- Aldermore Bank
- Bank of Scotland
- Clydesdale Bank
- Lloyds Bank
- Newcastle Building Society
- Ulster Bank
- Virgin Money
- Yorkshire Bank
Unlike a cash ISA account, where you can open a new one each tax year, you can open only one Help to Buy ISA account with one provider, however, you can transfer it between different providers to get the best interest rates i.e. in case you are getting a lesser interest rate with one provider, you can always ask it to transfer your account to the new provider.
In case, you have a cash ISA account and a Help to Buy ISA account, then it this case you cannot pay into both the accounts in the same tax year. But in case you have cash ISA account and you want to open a Help to Buy ISA account in the same tax year, you can do that.
Once you have opened Help to Buy ISA account, you can pay up to £200 in any calendar month and this amount should be paid by 25th of every month, including the month you have opened your account.
How can I Withdraw Money from my Help to Buy ISA Account?
You can withdraw money from your Help to Buy ISA account at any point of time however; it is advisable to connect with your solicitor for the same and withdrawals may be made by cash, cheque or bank transfer and cash withdrawals are subject to a daily branch limit of £500 and up to £3,000 on 3 days notice. It is important to remember that you won’t be able to claim any Help to Buy ISA bonus on the amount you have withdrawn.
For one calendar month, you can save up to £200 in your Help to Buy ISA account, so in case if you have deposited £200 in your Help to Buy ISA account and then withdraw £50 in the same calendar month, you will have to wait until the next calendar month to make another deposit.
When can I avail my Help to Buy ISA Government Bonus?
You have to close your Help to Buy ISA account to withdraw the availed bonus amount and to close your account; you have to inform your ISA provider about your decision on the same. Once your ISA provider accepts and process your request, it will give you a closing letter which yo u can further pass it on to your solicitor who is assisting you in buying the house.
Once your account is closed and you have the closing letter from your ISA provider, your solicitor has to submit that letter to the government. This process can be done online and it involves an extra admin charges, because your solicitor is allowed to give you a bill of up to 60 euros including VAT charges.
When you are at a lookout for a comfortable first-ever house, majority of times you will be asked by the property dealers to submit token amount in order to secure the property for you and the commission for them. Generally, they ask you to submit 10% of the total cost but if your negotiation skills are good enough, you can negotiate and reduce the token amount to 5% as well, which is also called as Home Exchange Amount and you can use the money saved in your Help to Buy ISA account as home exchange amount, however, you will receive the mortgage money and the Help to Buy ISA bonus; only when you close your Help to Buy ISA account.
Which is a better ISA for you: Help to Buy ISA or a Lifetime ISA?
Lifetime ISA was introduced on 6th April2017 and just like Help to Buy ISA, it also offers 25% bonus on your total saved amount. You can use it both for buying your first-ever house and can save it to use post retirement. Whereas Help to Buy ISA has its own advantages. So, how to decide in between Help to Buy ISA and Lifetime ISA?
Key difference between Lifetime ISA and Help to Buy ISA is listed below in the table:
|Help to Buy ISA||Lifetime ISA|
|Maximum Contribution||2400 Euros per year||4,000 Euros per year|
|Maximum Bonus Amount||3000 Euros||32,000 Euros|
|When Can You Avail The Bonus Amount||On completion of It i.e. when you buy a home.||Added annually in the 2017/2018 tax year, then monthly from April 2018|
|What Are The Investment Options||Via Stocks and Shares||No Investment Options are there. You can only do cash savings.|
|Maximum Price of Property You Can Buy||250,000 Euros (450,000 Euros in London)||450,000 Euros in London|
|How Quickly Can You Use It||Only when you have saved 1600 Euros i.e. in minimum 3 months.||After 12 months from the opening date.|
|Eligibility||First time house buyer above 16 years of age.||Anyone aged 18 to 39.|
|Utility (Purpose)||Mortgage Deposit||Home Deposit and Mortgage Deposit|
|Can You Withdraw The Money In Case You Are Not Buying The House||Yes, you can. However, you will not get any bonus on your savings.||Yes, but only if you are above 60 years. Else you have to pay the penalty.|
As you can see, both Lifetime ISA and Help to Buy ISA have their plus and minus side. So, what do you do now?
Best part of these two ISAs is that you can open both, Lifetime ISA and Help to Buy ISA, however you can use the bonus amount only from one of them.
Important FAQa related to “Help to Buy ISAs”:
Who can apply?
The Help to Buy ISA is only available to first-time buyers who wish to purchase a property as their main residence. It is not a buy-to-let scheme, and a scheme administrator will oversee this area to ensure that the government’s cash bonus is going to the right people.
You could double your investment; it’s per household, not per person.
Accounts are limited to one per person rather than one per household, so people who intend to purchase a property together could both take advantage of the government bonus. For basic rate taxpayers, this is equivalent to saving completely tax-free for their first home
When and for how long?
Savers can open a Help to Buy ISA for a four-year period after August 2015 when the scheme formerly launches. Once an account is opened there is no limit on the period in which a person can save into a Help to Buy ISA and no time limit on when they can use their government bonus.
How does it work?
The Help to Buy ISA allows you to make a maximum monthly investment of £200 tax free up to a total of £12,000; this investment is topped up by a government bonus of 25%.
Under the scheme you are allowed to make an initial deposit of £1,000. This means that in the first month you could invest £1,000 as your initial deposit plus your £200 monthly deposit allowance, all tax free. That is a very nice tax-free investment, which when you’re ready to purchase your property, government tops that up by 25%.
How much can you invest?
The 25% bonus from the government is capped at £3,000. This means that the total amount you can invest over the period of the ISA and attract the bonus is £12,000. The bonus will apply to both the amount a person saves and the interest accrued since the account was opened.
How is the money allocated?
The money saved in a Help to Buy ISA, plus interest, plus the bonus will be calculated and paid when you are ready to buy your first home. The government bonus will only be paid towards the purchase of a first home located in the UK, with a purchase value of £450,000 or less in London, and £250,000 or less in all other parts of the UK.
How much can you save?
The government bonus can be claimed at any time, but it is subject to a minimum bonus amount of £400. The government bonus will be calculated by the scheme administrator on the account balance at the point of claim.