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Use the Lisa loophole by April or lose it

Earn extra government money by transfering a Help to Buy Isa into a Lisa by April
Use the Lisa loophole by April or lose it

Savers who opened a Help to Buy individual savings account (Isa) have less than five months to transfer it into a Lifetime Isa (Lisa) and receive an extra government bonus and extended Lisa allowance.

The Lisa was launched on 6 April this year to help buy a first home or save for retirement. Up to £4,000 can be saved into a Lisa each year, up until age 50, and those saving into one will receive a government bonus worth 25 per cent of their contribution a year – up to £1,000. The Lisa can be used to buy a first home worth up to £450,000, or left invested until age 60. The annual £4,000 Lisa allowance counts towards your overall annual Isa allowance, which is £20,000 for the 2017-18 tax year.

The Help to Buy Isa was launched in 2015, also to help buy first homes worth up to £450,000 in London and up to £250,000 outside London. You can save up to £3,400 in the first year of opening a Help to Buy Isa and £2,400 each year afterwards. You receive a government bonus worth 25 per cent of your contribution up to a maximum of £3,000, but do not get any government bonus for savings of less than £1,600.

Savers who opened a Help to Buy Isa between launch in December 2015 and April 2017 could more than double the usual government bonus on a Lisa due to a one-off loophole that closes on April 2018.

This tax year – 6 April 2017 to 5 April 2018 – savers can transfer the value of their Help to Buy Isa as at 5 April 2017 into a Lisa without it counting towards the £4,000 annual limit, and receive a 25 per cent bonus on the whole amount. Normally, annual Lisa subscriptions are limited to £4,000 a year, meaning the government bonus each year is capped at £1,000. But until 5 April 2018 any Help to Buy Isa funds built up before 6 April 2017 will not count towards the annual contribution or bonus limit so you could take home extra government money. If you transfer any money you saved into a Help to Buy Isa in the current tax year this will count towards the annual £4,000 Lisa limit. 

 

Hargreaves Lansdown says 90 per cent of the transfers into its Lisa have been from Help to Buy Isas. "If you opened a Help to Buy Isa before the launch of the Lifetime Isa, you can take advantage of special rules and get the government to boost your property fund by hundreds of pounds when you transfer it to a Lisa," says Sarah Coles, personal finance analyst at Hargreaves Lansdown. "However, you only have until April 2018 to act, so you'll need to get your skates on."

However, not all Lisa providers let you move money in from other Isas. Nutmeg does not allow savers to transfer any kind of Isa into Lisas. AJ Bell allows transfers in from Help to Buy Isas but not other kinds of Isa, although aims to start doing this by the end of 2017. The Share Centre allows transfers in from all types of Isa.

Other reasons to move into a Lisa

You can only hold your Help to Buy Isa contributions as cash, but you can invest a Lisa in stocks and shares. Patrick Connolly, chartered financial planner at Chase de Vere, says: "The Lisa is an improved version of a Help to Buy Isa and for most people it will be the most suitable approach. It has higher investment limits, there is more flexibility in what you can invest in and you can pay more into it every month. You can also pay in lump sums rather than having to pay in monthly amounts, as with a Help to Buy Isa."

The £200 a month limit on Help to Buy Isa contributions cannot be rolled over if you don't use your allowance one month, whereas your annual £4,000 Lisa allowance can be paid in at any time during that tax year.

A key benefit of a Lisa is that you can earn a larger government bonus than with a Help to Buy Isa, for which it is capped at £3,000. You get a government bonus on all contributions into a Lisa up to the age of 50.

The Help to Buy Isa bonus is only paid when you are close to buying your first home. At that point you need to instruct your solicitor or conveyancer to apply for your government bonus, which once received will be added to the money you are putting towards your first home. 

The bonus must be included with the funds consolidated at the completion of the property transaction. The Help to Buy bonus cannot be used for the deposit due at the exchange of contracts, or to pay for solicitors' and estate agents' fees, or any other indirect costs associated with buying a home.

But with a Lisa, in this tax year the government bonus will be paid at the end of the year, and from April 2018 it will be paid a few weeks after payments in.

If you don't use the Lisa to buy a home you can keep the bonus, keep saving and use it for retirement. If you don't use the funds in a Help to Buy Isa for a first-time property purchase you do not receive a bonus.

And the Help to Buy Isa's days are numbered: you cannot open one after 30 November 2019, although can keep paying into existing accounts until 30 November 2029.

Lisa restrictions

If you need to buy a property within the next year it makes sense to stay in a Help to Buy Isa, because a Lisa must have been open for at least 12 months before it can be used for a property purchase.

You cannot open a Lisa if you are under 18, or 40 or over, but you can open a Help to Buy Isa from age 16.

If you take the money out of a Lisa before you turn 60, other than to buy a first home or if you have less than 12 months to live, you will incur a 25 per cent exit penalty. You can take out your money without incurring a penalty up until April next year, though.

Cash vs stocks and shares  

You can invest a Lisa in stocks and shares, but for some it may be better to have their savings in cash. Cash has not been a good source of returns for many years due to the UK's record low interest rates. But if you cannot afford to lose any of your property purchase fund to the stock market or plan to buy a home in the next five years, it makes sense to hold your savings in cash.

"For many people there is a very strong argument for holding money in cash, and it boils down to whether you need access to your money in the short to medium term," explains Mr Connolly. "If you are saving for a mortgage deposit and want to buy within five years, hold cash. If you have between five and 10 years you should think about a multi-asset approach, and over 10 years stocks and shares make sense."

If you are looking to hold your savings in cash, the rates on Help to Buy Isas are better than those offered by Lisas. The best rate on a Help to Buy Isa will be the gross interest of 2.28 per cent that Newcastle Building Society will pay from 1 December 2017. Barclays'Buckinghamshire Building Society's and Nottingham Building Society's Help to Buy Isas pay a gross interest rate of 2.25 per cent.

But the Skipton Building Society Lisa, for example, pays an annual equivalent rate of 0.5 per cent on cash. And Hargreaves Lansdown does not pay any interest on cash in Lisas worth up to £4,999.99, and only 0.05 per cent on those above £5,000.

Lisa providers 

 Cash/investmentsDIY or ready-made portfolios?
Hargreaves LansdownY/YDIY
NutmegY/YReady-made 
AJ Bell YouinvestY/YDIY
SkiptonY/Nna

 

Best Help to Buy Isa cash rates 

ProviderAERGrossInterest PaidRate Type
Newcastle BS2.30%2.28%MonthlyVariable Rate
Barclays Bank2.27%2.25%MonthlyVariable Rate
Buckinghamshire BS2.25%2.25%YearlyVariable Rate
Nottingham BS2.25%2.25%YearlyVariable Rate
Nationwide BS2.00%2.00%AnniversaryVariable Rate
Virgin Money2.00%2.00%YearlyVariable Rate
Halifax2.00%2.00%AnniversaryVariable Rate
NatWest2.00%1.98%MonthlyVariable Rate
HSBC2.00%1.98%MonthlyVariable Rate
Ulster Bank2.00%1.98%MonthlyVariable Rate

Source: Moneyfacts, as at 7.11.17

 

Help to Buy Isa/ Lisa comparison 

 LisaHelp to Buy Isa 
How much can you save each year?£4,000£2,400 (£3,400 in the first year)
Can you invest lump sums?YesNo - monthly payments only (£200 maximum per month), although you can make one additional payment of £1,000 in the first month
What is the maximum bonus?£32,000£3,000
When do I receive the government bonus?At the end of the 2017-18 tax year and monthly from 2018-19When you buy your first home
Can I earn interest on, or invest the government bonus?Yes. You can invest or earn interest on the government bonus as soon as it has been paid in to your LisaNo. The bonus is paid to your solicitor or conveyancer when you buy your first home
When can I use the money to buy a house?After 12 monthsAfter £1,600 has been saved
Who can open the account?Adults under 40Those aged over 16
What’s the maximum property value allowed? £450,000£250,000 or £450,000 in London

Source: Hargreaves Lansdown