Using the Lifetime ISA to buy a first home
Lifetime ISAs could be opened by individuals from April 2017 but it is only now that a reasonable number of providers exist. Are they the right thing for you, or if not you, your children?
Adults under the age of 40 are able to open an account and contribute up to £4,000 per year and receive a 25% bonus from the government after the end of each tax year. If £4,000 is invested, the investment limit for the other types of ISAs falls to £16,000. Funds, including the government bonus, can be used to buy a first home up to £450,000 at any time from 12 months after the first subscription, or can be withdrawn from age 60 completely tax-free. In this article we are considering the first use – as an investment vehicle to fund the purchase of a first home. Is the use of a Lifetime ISA better than the Help to Buy ISA?
Help to Buy ISAs started in 2015. The scheme provides a government bonus to each person who has saved into a Help to Buy ISA at the point the purchase of their first home is completed. The maximum bonus is £3,000 on £12,000 of savings but the maximum that can be invested in the first year is £3,400 (£1,200 in month one followed by 11 monthly payments of £200). You need to have at least £1,600 saved to get the bonus. The bonus is available on homes worth up to £250,000, or £450,000 in London. As the Help to Buy ISA is a type of cash ISA the rule that an individual can only open one cash ISA each tax year comes into play. Some providers will bundle a Help to Buy ISA and a cash ISA together in the same wrapper to get around this issue.
You can have both a Help to Buy and Lifetime ISA at the same time but you will only be able to use the bonus from one of the accounts to purchase your first home.
In a straight comparison of the bonuses the Lifetime ISA provides more, particularly if the timescale for the purchase of a home is some way off. The bonuses each year are higher and are received after the end of each tax year and so can boost investment returns.