In the 2015 Budget, the government announced plans for a new help-to-buy individual savings account, designed to help first time buyers save a deposit to purchase their first home. Sarah Laing highlights the new scheme, which is expected to take effect later this year.
Broadly, the government has stated that it is committed to building 200,000 new starter homes by 2020. It is also committed to the ‘help-to-buy’ policy (as announced in the 2015 Budget) and will give housing association tenants the same right to buy their homes at a discount that council tenants enjoy. However, the Conservatives were also the only party to state in their election manifesto that they would keep the ‘bedroom tax’.
The original right-to-buy scheme, which was set up in the 1980s, was credited with taking the Conservatives to election victory under Baroness Thatcher. However, the current rules make it difficult for 1.3 million people living in housing association properties to purchase their homes. Under the new government, housing association tenants are to be given the full right to buy discount.
Help-to-buy ISA
The new help-to-buy individual savings account (ISA), which is expected to be available from autumn 2015, will enable first-time buyers to save up to £200 a month towards their first home. Investors will receive £50 from the government for every £200 saved, up to a maximum of £3,000. This means that the maximum that can be saved in a help-to-buy ISA is £12,000. The government bonus is added to this amount, so total savings towards the property purchase can be up to £15,000.
Accounts will be limited to one per person rather than one per home, which means that those buying together can both receive a government bonus. A couple will be entitled to hold an ISA each, meaning that a total of £24,000 could be built up across two accounts. With the addition of the government bonus, a total of £30,000 can be built up by a couple under the scheme.
An initial deposit of £1,000 may be made into the account, in addition to regular monthly savings limits. This initial deposit also qualifies for the 25% boost from the government.
The minimum bonus payable by the government will be £400, and the maximum will be £3,000 per person.
The bonus can be claimed once savings have reached the minimum amount of £1,600. Under the scheme, it will take investors just over four and a half years to qualify for the maximum bonus of £3,000, if desired.
Eligible investors
Help-to-buy ISAs will be available to individuals aged 16 and over. The bonus will only be available to first-time buyers purchasing UK properties.
New accounts will be available for four years, but once opened, there will be no limit on how long an account can be held.
The bonus will be paid when the property is purchased. It will be available on home purchases of up to £450,000 in London, and up to £250,000 outside London.
What doesn’t qualify?
There are certain restrictions under the new scheme, including:
- help-to-buy ISAs cannot be used if the property is to be rented out;
- purchases of overseas property do not qualify under the scheme;
- only one help-to-buy ISA may be held by an individual; and
- investors cannot open a help-to-buy ISA and a normal cash ISA in the same tax year.
Interest
Since interest rates on help-to-buy ISAs will vary, investors should shop around to ensure they get the best deal. The government bonus does not attract interest as it is paid directly to the mortgage provider when the property is purchased. However, the final bonus is calculated using the money saved and the interest that has built up while the account has been open.
Practical Tip :
Anyone planning to open a help-to-buy ISA later this year should not open a new cash ISA in this tax year. It is not permissible to hold both.
