Finance

A nicer ISA?

ISA

The recent Budget has introduced another ISA and new tax allowances. Kay Hill examines the fine print

It seems that ISAs are a bit like London buses, no sooner had everyone got over the excitement of the new Help to Buy: ISA – announced in the 2015 Budget – than along came the Lifetime ISA (LISA), plus an increased regular ISA allowance and a new Personal Savings Allowance.

Both the Help to Buy and Lifetime ISAs offer generous bonuses to first time buyers (see box on page 95 for full details). However, you can’t open a LISA until April 2017 and, as you can’t use it to buy a home until it has been open for a year, it is not much use if you plan to buy before April 2018. As you can open a Help to Buy ISA right now and begin benefiting from the bonuses, it pays to do so – if you wish, you can transfer it into a LISA any time during the first year that they are available, without losing that year’s LISA allowance.

Older and younger potential home buyers should also open a Help to Buy: ISA without delay (they are available until December 2019). The new LISA will only be open to those over 18 and up to 39, so those who are aged 16-18 or over 40 should make the most of the wider age range of the Help to Buy: ISA.

You cannot contribute to a cash ISA and a Help to Buy: ISA in the same year (although you can have stocks and shares and Help to Buy: ISAs concurrently). You will be allowed to contribute to a Help to Buy:ISA and a LISA in the same year, but you can only use one set of bonuses to buy your home (although you could keep your LISA and bonuses to save for retirement). You can also have a LISA alongside other cash, investments or innovative finance ISAs, but total annual contributions must be within the ISA limit, which, in April 2017, will be raised from £15,240 to £20,000.

There is, however, another innovation to muddy the waters; the Personal Savings Allowance. This new allowance means that around 17 million people won’t pay tax on their savings anyway – so the tax-free status of ISAs will be less relevant. This tax year, basic rate taxpayers can earn £1,000 of savings income tax free (£500 for higher rate taxpayers). For those earning more than £150,000, the Personal Savings Allowance does not apply, so ISAs are the only option for tax-free saving. For most, unless you have a huge deposit tucked away that is earning more than your PSA, then it is the overall interest rate that counts – and that could be a bank account rather than an ISA.

Another piece of Budget good news was the two ‘micro-entrepreneur’ allowances of £1,000 each, which will come into force next April. One covers small trading income, like selling things you have made on Etsy, while the other covers income generated from your property, such as renting a room via Airbnb, renting your driveway, or charging others to use space in your loft. In each case, income under £1,000 will no longer have to be declared, making it easier to earn a bit extra to help with mortgage payments. Those renting a room regularly will still be better off using the Rent-a-Room tax allowance of up to £7,500 tax-free, however.

There is another Budget measure that first time buyers might have cheered at, but which may not be entirely good news, and that’s the 3% Stamp Duty surcharge for those buying a second home. On the face of it, making buy-to-let significantly less attractive should leave more small homes available for first time buyers, but not everyone is convinced. Research by property portal OnTheMarket.com shows that 60% of estate and letting agents believe the surcharge will increase rents. Estate agent Ben Hudson, from Hudson Moody in York, explains: “I understand the Government’s objective in trying to support first time buyers into the market, however, there are risks that the increased costs for landlords may end up being levied on tenants. If this is the case, then it’s likely first time buyers may be delayed in getting a foot on the housing ladder as they will need longer to save for a deposit, because they will be paying more rent.”

There are also a few odd circumstances in which the surcharge could affect those who regard themselves as first time buyers – for example, owning a small ski chalet, or a holiday flat abroad, will mean that someone buying their first and main home in the UK will have to pay the charge. And if a first time buyer is purchasing a home with a partner who owns another property – even if it is just being still on the deeds of a home where a former spouse lives – the surcharge will be payable on the whole of the new home.

A TALE OF TWO ISAS

The key differences between Help to Buy: ISAs and Lifetime ISAs:

How much can you put in?
HTB – An initial deposit of up to £1,000, then up to £200 each month. It is a cash-only saving.
LISA – Up to £4,000 a year as a lump sum, or multiple payments, as cash, or stocks and shares.
What is the bonus?
HTB – The Government will top up savings by 25%, up to a maximum of a £3,000 bonus. You must save at least £1,600 to qualify.
LISA – The Government will add a 25% bonus to any contributions made each year, up to a maximum bonus of £1,000 a year and up to the age of 50.
Who can get one?
HTB – Any first time buyer aged 16 or over
LISA – Adults born after 6 April 1977 (although the money can only be used for house purchase if you are a first time buyer)
When can you use it?
HTB – Once you have more than £1,600 saved
LISA – After it has been open for 12 months
What can you buy?
HTB – A home costing up to £250,000 (or £450,000 in London).
LISA – A home costing up to £450,000 anywhere in the UK.
In both cases you must live in the home, you cannot rent it out.
Can I get at my money?
HTB – The bonus is only payable when a qualifying property is purchased (so you don’t earn interest on it). Your solicitor applies for the bonus and may charge up to £60. You can take your money out before that if you wish, or use it for something else, but you will get no bonus, although you will keep the tax-free interest you have earned.
LISA – The bonus is paid into your account at the end of each tax year until your 50th birthday, so you earn interest on it as well. The money is paid to your solicitor if you are using it for a first home. If you don’t buy a qualifying property the money can continue earning interest in your account until you reach 60 when it can be withdrawn tax-free. If you want to take money out for another reason, you will lose all the bonus, any interest on the bonus, and be fined a 5% penalty on what is withdrawn.

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