The Help to Buy ISA will cease to exist from this weekend, so if you don’t make it by the deadline, you’re locked out. This means for first-time buyers the Lifetime ISA will become the only option to get a Government bonus to boost your deposit savings.
The Help to Buy ISA has been hugely popular, helping more than 234,000 properties to be bought, while more than 310,000 bonuses were paid out. But along with Personal Equity Plans, Tax Exempt Special Savings Accounts and Child Trust Funds it has been consigned to the graveyard of financial products.
If you’ve already opened a Help to Buy ISA you can keep the account and have a decade to use it and claim the bonus. But if you didn’t get in before the deadline then the Lifetime ISA is your only option to get free Government cash to boost your coffers for a house deposit.
But watch out for these sneaky traps with the Lifetime ISA, to avoid facing delays or even scuppering your home move plans at the last minute. If you fall foul of the rules you might struggle to claim your bonus, or find out that your account isn’t even useable. As long as you stick to the rules you could well be better off with the Lifetime ISA, as you can save more each year, get more free money from the Government, buy a more expensive property outside of London and have more flexibility on when you pay money in.
1. You need to put money in your Lifetime ISA before your 40th birthday, or you miss out
Lifetime ISAs can be opened by anyone after their 18th birthday but before their 40th birthday. However, you can’t just open the account and forget about it, you need to actually pay money in. HMRC does not deem the account to be officially opened until money is put in – even if that’s only £1.
Anyone rushing to open the account before their 40th birthday needs to leave enough time to open the account and actually pay some cash in, bearing in mind bank transfers can also take a number of days to complete. If money isn’t deposited in time, then HMRC states the account must be closed.
2. You need to deposit money in the same tax year you opened the Lifetime ISA
Similar to the first rule, you can’t just open an account and assume that’s the job done – you need to actually pay money in during the same tax year. So if you opened an account after April 6th this year, you’ve got until April 5 2020 to put money in before it’s counted as officially opened.
You can use the same £1 trick, and just deposit a pound into the account. If you don’t pay anything in HMRC rules state that the account has to be closed and you will have to reapply. It’s a strange rule as it’s not one that applies to other ISA or SIPP accounts, so could easily catch some savers out.
3. You can’t claim the bonus if your details don’t match HMRC
The Government pays a 25% bonus on all contributions to a Lifetime ISA, up to £4,000 a year. When your Lifetime ISA provider claims your 25% Government bonus, it submits all the details it has on you and HMRC checks that this tallies with the information it has on file before it will pay out the bonus. If there are any discrepancies, HMRC will not pay up.
The most likely instance is where someone has changed their name, particularly after getting married, and hasn’t updated this with HMRC, or where they have made an error on their forms. It may seem like a small issue, but it’s affected hundreds of cases we’ve seen, and can mean there’s delays in you getting your hands on your bonus.
4. You have to open and fund the account 12 months before you buy a property
If you plan to buy a property in the next 12 months, the Lifetime ISA is not the account for you. The rules mean you have to have the account open for 12 months before you can use it to buy a property. And remember, that’s 12 months from the first payment into the account, not just opening it.
The 12-month rule is intended to stop people paying money in, immediately claiming the lucrative Government bonus and then withdrawing the money, but 12 months feels like a very long time. Six months, or even three months would be more reasonable.
5. You can’t pay into a cash Lifetime ISA and a stocks and shares Lifetime ISA in the same tax year
Unlike others ISAs, where you can open and pay into one cash ISA and one stocks and shares ISA in the same tax year, you can only open one Lifetime ISA each year – so you have to pick between cash and stocks and shares. If you’ve accidentally opened two Lifetime ISAs, you’ll keep the first account you opened and the second will be closed, with any money returned to you.
Frustratingly for some savers this rule is rigid, regardless of how much you’ve paid in. So you could have paid £10 into the first Lifetime ISA and £3,990 into the second, but the second one will still be closed.
This is a particularly important to remember if you are transferring from one Lifetime ISA you’ve opened earlier in that tax year to another. You can still do this, but you need to make sure the full transfer from the original Lifetime ISA is your first payment into the new ISA – so avoid making any contributions to your new Lifetime ISA until the transfer has actually happened.
6. If you transfer money from an ISA it counts towards your £4,000 limit
You can contribute up to £4,000 into a Lifetime ISA each year. If you transfer money in from another ISA, it will still count towards this limit. The only exception is where you are transferring from one Lifetime ISA to another Lifetime ISA (but see trap 5).
7. You could wait up to eight weeks for your bonus money
The 25% Government bonus on the Lifetime ISA is paid monthly. However, HMRC only allows your Lifetime ISA provider to apply for the bonus once a month, and it can take up to 14 days to pay the money from this date.
For HMRC’s purposes, each month runs from 6th of the month to 5th of the following month. Your provider can then apply for the bonus from the 19th of that month, and get the bonus paid up to 14 days from this point (although in reality it can be paid sooner).
So for example, someone who paid the money in on the 6th November will not see the bonus for at least six weeks, and it could be as much as eight weeks. If you’re still saving for your deposit it’s not a big deal but if you’re currently in the process of buying a house and had banked on the latest month’s bonus money to go towards your house purchase you need to check your dates and make sure it will reach your account in time. If it doesn’t, the money will either have to stay in your account until you reach age 60, or you can withdraw it and pay the 25% exit penalty on that cash.
These articles are for information purposes only and are not a personal recommendation or advice. A Lifetime ISA is not for everyone. If you withdraw money before age 60, other than to purchase your first home, you will pay a government withdrawal charge of 25%. This may mean you get back less from your LISA than you paid in. Also, if you choose to save in a Lifetime ISA instead of enrolling in, or contributing to, your workplace pension scheme you will miss out on the benefit of your employer’s contributions to that scheme and your current and future entitlement to means tested benefits may be affected.
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