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Help to Buy ISAs vs Lifetime ISAs - what you need to know

13 April 2017 | A A A
Help to Buy ISAs vs Lifetime ISAs - what you need to know

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

The average house price paid by a first-time buyer in the UK last year exceeded £200,000 – over seven times the national average annual salary. Progressively rising house prices, accompanied by low earnings growth, have made it increasingly difficult for young people to get on to the property ladder.

In response, the government has introduced a number of initiatives to help first-time buyers, including the Help to Buy ISA and more recently the Lifetime ISA (LISA). At first glance they seem quite similar – the government adds a 25% bonus and both are tax-efficient ISAs meaning you pay no UK income tax on interest or income and no capital gains tax.

However, there are a number of significant differences between the two. Below we compare them and explain the transfer rules to help you understand your options.

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Should you be unsure of an investments suitability for your circumstances please seek personal advice. Remember tax rules and benefits can and do change and the value of any benefits depends on individual circumstances.

Comparison

 Lifetime ISAHelp to Buy ISA
How much can you save each year?£4,000
(up until the day before your 50th birthday)
£2,400
(£3,400 in the first year)
Who can open the account?18 – 39 year oldsFirst-time buyers aged over 16
How can you save?Flexibility to make lump sum or monthly contributionsAn initial lump sum of up to £1,200, then up to £200 per month thereafter
What is the government bonus?up £1,000 each tax year until you turn 50*Up to £3,000 in total
When do I receive the bonus?At the start of next tax year for the current tax year, and monthly from 6 April 2018
You can invest or earn interest on the government bonus
On completion of buying your first home
When can I use the money to buy a house?12 months after openingAfter £1,600 has been saved (possible in 3 months)
What’s the maximum property value allowed?£450,000£250,000 (£450,000 in London)
Can I withdraw the money for any reason other than buying my first home?You can also withdraw your money tax free after your 60th birthday.
From 6 April 2018 withdrawals made before you are 60 and are not to purchase a first home will usually incur a 25% government withdrawal charge
You can withdraw your money at any time but won’t receive the government bonus on monies you withdraw.

*You can also earn a bonus on amounts transferred from a Help to Buy ISA to a Lifetime ISA in the 2017/18 tax year.

Find out more about transferring from a Help to Buy ISA to a Lifetime ISA

Four things to consider when transferring a Help to Buy ISA to a Lifetime ISA

  1. Bigger bonus

    You’ll receive a 25% bonus from the government on the money you pay in to a Lifetime ISA, worth up to £1,000 a year. You can also earn a bonus on a transfer from a Help to Buy ISA to Lifetime ISA in the 2017/18 tax year.

    The Help Buy ISA bonus is 25% of the closing balance of your account but is capped at £3,000.

  2. Save more sooner

    You can contribute up to £4,000 a year in to a Lifetime ISA and contribute how you like, whether as a lump sum or regular payments. A Help to Buy ISA only allows a maximum of £200 to be saved each month (£1,200 in the first month).

    Furthermore, after the first year when the bonus will be paid at the start of next tax year, the Lifetime ISA bonus will be paid monthly and will be available to invest or earn interest on once paid. In contrast, the Help to Buy ISA bonus is only paid on completion of the purchase of your first home meaning it cannot earn interest.

  3. Higher property value

    You can buy a property worth up to £450,000 with a Lifetime ISA but this falls to £250,000 if using a Help to Buy ISA (except in London where it’s also £450,000).

  4. Invest in the stock market for potentially higher returns

    Our Lifetime ISA offers the opportunity to invest in the stock market, unlike Help to Buy ISAs which only allow you to save as cash. The stock market has the potential to deliver greater returns than cash over the longer term and therefore could help you buy your first home quicker. However, unlike cash which is guaranteed, the value of your investments can go down as well as up so you could back less than you invest and should be considered for longer term investments.

    We have a wide range of investments to choose from, but if you need some guidance our experts have also highlighted some investment ideas for Lifetime ISAs.

Remember, penalty-free withdrawals from a Lifetime ISA can only be made to purchase a first property, or after age 60. Any other withdrawals are usually subject to a 25% government withdrawal fee which means you could get back less than you put in. In addition, if you are close to turning 40 and considering transferring, it might be sensible to open your Lifetime ISA with a lump sum contribution, in case the transfer doesn’t compete before your 40th birthday.

Expert Q&A: Help to Buy ISA transfers

Listen to our experts answer some commonly asked questions about transferring from a Help to Buy ISA to a Lifetime ISA.

Buying your first home within the next 12 months?

Government rules require a Lifetime ISA to be open for 12 months before the bonus can be used to purchase a first home. If you are definitely buying a property in the next 12 months and you don’t already have a Lifetime ISA open, a Help to Buy ISA could be considered. A Help to Buy ISA can be used to purchase a first home as soon as £1,600 has been saved, which is possible after three months.

How to transfer your Help to Buy ISA to our Lifetime ISA

It’s easy to transfer your Help to Buy ISA to our Lifetime ISA, and if you transfer this tax year you can also contribute up to an extra £4,000 into your Lifetime ISA:

  • You can transfer your Help to Buy ISA based on the value at 5 April 2017 (plus any accrued interest) to a Lifetime ISA before 6 April 2018.
  • This transfer will not count towards your Lifetime ISA allowance and you will receive the 25% government bonus on the value of the transfer. This bonus will be paid at the start of next tax year.
  • Any additional Help to Buy transfers, transfers of current year subscriptions or transfers made after 5 April 2018 will still receive the government bonus but also count towards your £4,000 annual Lifetime ISA allowance.

Example

Sophie has a Help to Buy ISA which is valued at £4,400 on 5 April 2017. She transfers her Help to Buy ISA on 15 April 2017 (2017/18 tax year) and qualifies for the 25% government bonus on her transfer, worth £1,100.

As this transfer does not count towards her Lifetime ISA allowance, Sophie also contributes £4,000 (and so will receive a further £1,000 government bonus) to her Lifetime ISA before 6 April 2018. In respect of the 2017/18 tax year, £10,500 is paid in to her Lifetime ISA.

The Hargreaves Lansdown Lifetime ISA is designed for investors who are happy making their own investment decisions. If you would like to transfer all you need to do is read our Terms & Conditions (including Tariff of Charges) and Key Features, and then complete and return our simple one page transfer form.

Find out more about our Lifetime ISA

Find out more about transferring a Help to Buy ISA