Help to Buy ISAs
Are you a first time buyer? Our Legal Executive, Hannah Scutt, explains the Help to Buy ISA scheme
Since 1st December 2015 there has been a new initiative to assist first time buyers (over the age of 16 years) to get onto the property ladder. This new initiative comes in the form of the Help to Buy ISA, which benefits those prospective first time buyers who are saving for their deposit.
The Help to Buy ISA is not dissimilar from a normal cash ISA in that it is a form of tax-free saving, which can be opened in a number of mainstream banks, interest is accrued in the normal way, with the added bonus of obtaining a ‘lump sum bonus’ from the government when completing the first property purchase.
This bonus can be obtained where a first time buyer is purchasing a property with the assistance of a mortgage, which is worth up to a maximum of £250,000 or up to £450,000 if they are buying in London.
As with anything, there are limitations. The bonus is set at a maximum of £3,000 per person. However, a couple who are looking to purchase a property together are able to each set up an individual Help to Buy ISA, which means they would receive a maximum of £6,000 to assist with their purchase.
On opening a Help to Buy ISA one is able to pay in a maximum of £1,200 to get things started. Going forward you can deposit up to £200 of savings into your Help to Buy ISA each month.
In order to benefit from the scheme, you will need to have saved a minimum of £1,600 to be able to drawdown the bonus from the government, as the government has set a minimum bonus amount of £400. The government contribution is to add 25% to your savings. This contribution is capped at £3,000 per person and therefore to obtain this maximum bonus you will need to have saved £12,000. Based on the assumption that full contributions are made each month, it would take a minimum of 4 and half years to reach the £12,000 savings in order to benefit from the full £3,000 bonus.
A Help to Buy ISA is straightforward to set up at many mainstream banks. If the first time buyer has already set up a normal cash ISA within the same tax year as they wish to open a Help to Buy ISA, then the cash ISA will have to be transferred to a Help to Buy ISA. If there is more than the initial £1,200 already in the cash ISA at the time of transfer, then the balance should be transferred to another savings account, out of the ISA.
As with any ISA, different banks have different rates of interest. If at any point during the saving period the first time buyer wishes to transfer the Help to Buy ISA to another bank to obtain a preferable rate of interest, this is possible.
The government have put measures in place to ensure that this scheme is not abused. They have achieved this by making the drawdown of the bonus funds a process controlled by the first time buyers Conveyancer and themselves. In readiness for completion the Conveyancer will apply for the government bonus sum once the first time buyer has withdrawn their savings and closed the ISA account. The ISA closure summary will be submitted by the Conveyancer via the Help to Buy online portal, together with the first time buyers Declaration. This Declaration is provided in standard form which sees the Buyer declaring they are a UK resident; they are a first time buyer with no interest in any other land or property; have never previously received a bonus under the Help to Buy Scheme; and that the property will be occupied as their main residence. Funds will be received directly into the Conveyancer’s firms account, which can then be utilised on the purchase.
This government saving initiative can also be used in conjunction with other Help to Buy schemes, including the Help to Buy Mortgage Guarantee Scheme, Help to Buy Equity Loan Scheme and Shared Ownership Scheme.
The Help to Buy ISA is flexible in that should the saver decide not to purchase a property with the funds, they can simply withdraw their saving and any interest accrued without being entitled to receive the government bonus.
All good things must come to an end, and the Help to Buy Scheme does have a shelf-life. Help to Buy ISA accounts will only be available to open up until 30 November 2019. As long as the account is opened before this date, first time buyers may continue to save and benefit from the bonus, which must be claimed before 2030.