The government's new Help to Buy ISA is a tax free savings vehicle for future first time property buyers. From 1st December 2015, first time buyers saving for a deposit will be able to save in a dedicated ISA that the government will ultimately top up by 25%, up to a maximum bonus of £3,000.
Help to Buy ISA owners will be able to deposit up to £200 a month in the dedicated ISA. They can also make a one-off contribution of up to £1,000 when the account is opened. As with a traditional Cash ISA, the interest received is tax free, and there are no restrictions on withdrawals so cash can be accessed at any time (though a specific process needs to be followed to receive the bonus).
When then ready to purchase their first home, the government will top up their savings by 25%, up to a maximum of £3,000. So, they will need to have accumulated £12,000 (including interest) to receive the maximum top up.
Couples buying together who are both first time buyers will each be able to fund a Help to Buy ISA, with the potential for combined savings of £24,000 topped up by a government contribution of £6,000.
Only a limited number of providers have currently agreed to offer the Help to Buy ISA: Barclays, Lloyds Banking Group, Nationwide, NatWest, Santander, and Virgin Money.
Clearly, for anyone eligible and for whom this scheme is relevant, this "money for nothing" is worth consideration. However, there are some wider points to consider.
- No bonus will be paid if you save less than £1,600 i.e. the minimum bonus is £400
- The bonus is only available on UK property purchases up to the value of £250,000, or up to £450,000 in London
- Excluding interest, the limited monthly deposit of £200 mean it will take over 4 years of saving in order to achieve the maximum bonus
As with all savings products, it will be important to compare the interest rate that different providers actually offer when the products launch next month, though there is an expectation that rates may be relatively attractive due to the restricted level of contributions, along with the providers hoping that savers will ultimately take out a mortgage with their Help to Buy ISA provider.
The Help to Buy ISA is a Cash ISA, so you can't also fund a Cash ISA in the same year. This may be an issue for those that have already funded a Cash ISA this year, but from April 2016 the introduction of the new personal savings allowance will mean that basic-rate taxpayers will be allowed to earn £1,000 tax-free interest on all savings (£500 for higher-rate taxpayers) so the "tax free" benefit of Cash ISAs will be removed for many people.
Perhaps the group to whom this Help to Buy ISA will be most attractive is those who have already amassed some or all of their deposit (either via savings or some other windfall) and are holding these funds in cash with a view to using them in the short to medium term. Using this cash to fully fund a Help to Buy ISA in the coming months will produce a return in the form of the government bonus way above that available anywhere else. Even those looking to purchase early in 2016 can benefit, with the minimum £400 bonus achievable within only 3 months (the time it will take to build up £1,600).
There is a formal process for receiving the bonus, via your solicitor, to ensure that the "first time buyer" criteria is met and that the bonus is used to purchase a qualifying property.
To discuss how we can help with financial and pension planning, please contact Norman Dalgleish.
For more information on buying your first home, please contact Ian Gray.