How does a Help to Buy Isa work?
Since 1 December 2015 first-time buyers have been able to save in a Help to Buy Individual Savings Account (HTB Isa) with the government adding money to it.
As with a traditional cash Isa, the interest earned is free of both income and capital gains tax.
In addition, when savers take money out to buy a house or flat, the government adds 25% to whatever is in the account, up to a maximum of £3,000.
So exactly how does it work?
Who is eligible?
You must be a UK resident, and a first-time buyer. Indeed you cannot have owned a property anywhere in the world. If you have already opened a cash Isa in the same tax year, you will almost certainly need to close it. (See further details below).
What property can you buy?
The property must be purchased with a mortgage. It cannot be a second property, or for buy-to-let purposes. The maximum purchase price is £250,000, or £450,000 in London. You do not have to buy a property through the government's Help to Buy scheme.
How much money can you pay in?
In the first calendar month, you can kick start the Isa with up to £1,200. This does not have to be paid in one go. But you may want to open the account early in the month to take most advantage of it. In subsequent months, you can pay in up to £200.
How much of a bonus will the government pay?
The government will add 25% to the account at the point you choose to buy a property. The minimum it will add is £400, meaning you need to save at least £1600. The maximum it will add is £3000, when you have saved £12,000.
The bonus is paid on the total amount in the account - in other words including the interest. But even if the account pays an interest rate of 2% a year, it will still take over four years of saving the maximum amount to earn the £3,000 bonus.
How will the bonus be paid?
Your solicitor or conveyancer will apply for the bonus when you buy a property. However, the bonus can only be paid out on completion. In other words, it cannot be used to help with the initial deposit, known as the exchange deposit, a restriction which only became clear in August 2016. If there is no house purchase, your savings will continue to receive the interest payable on the Isa account.
Can you open an HTB Isa with a friend?
No. Only individuals can open an account. But two people buying a property together can each use their bonuses, giving them up to £6,000 to set against the purchase price.
What if you have already got a cash Isa?
You can open one cash Isa in any tax year. So you can still have cash Isas from previous years, and open a HTB Isa too. If you have already opened a cash Isa in the current tax year, you cannot continue to hold that, and open an HTB Isa. So you will have to close the cash Isa.
Up to £1,200 can be transferred directly to the HTB Isa; the rest can be put into a stocks and shares Isa, or a non-Isa account.
The only exception to this is if your Isa manager offers an "umbrella" or "portfolio" arrangement, in which case it may be possible to maintain both a cash and an HTB Isa from the same tax years.
How long is the offer open for?
You will be able to open a HTB Isa up to 30 November 2019. After that date, you can continue to save in existing accounts. But all bonuses must be claimed by December 2030. However from April 2017, the Lifetime Isa (Lisa) will be available instead.
The Lisa offers a more generous government bonus. Savers will also be able to use the money either to buy a home, or a retirement income, and still receive the additional cash.
More details on the HTB Isa are available here