Lifetime ISAs, double tax break
SOUNDING like my parents or grandparents can have a positive or negative connotation, but one sticks for sure: ‘It wasn't like this for me as a child'.
My decisions were: football, tig, staring for hours at a stick in a stream, or, on a rainy day, three channels and a broomstick as a remote control.
Similarly, buying a house wasn't even on the agenda to be a problem.
In a world of ‘progress', students arrive into the ‘house purchasing scene', handicapped not only with student debt, but the starting mindset that debt isn't a bad thing, and that you can pay £14.99 per month to keep an eye on your credit score. Whoopee.
A lifetime of rent, or a desperate scramble to dig your nails into the first rung of ‘the ladder' ensues, which, without parental/grandparental assistance is no more than a dream for most who are struggling just to get by.
A ladder without a first rung is no great thing, especially the higher it gets.
The government is mindful that in a debt-driven economy, borrowing against an ‘asset' is a vital part of its economic strategy.
There are a few ideas in place to help-first time buyers which we have previously covered such as: the ‘help to buy' equity loan; shared ownership schemes; the starter homes initiative scheme which will see 200,000 new build homes in England sold to first time buyers with a 20 per cent discount by 2020; as well as Help To Buy ISA's (HTB ISA) and Lifetime ISA's (LISA).
The HTB ISA is being phased out, and some have encouraged new buyers to start a scheme before they end in November. I don't have the same urgency.
The HTB ISA was doomed from its launch. Ill thought out, and impractical in many ways, it is being replaced by the LISA.
You can still open an HTB ISA now and transfer to a LISA later, and indeed you could hold both at the same time, but you can only benefit from the government bonus on one.
How does the LISA improve upon the HTB ISA?
Maximum contributions are £4,000 per year rather than £2,400. At £2,400 per year, it's nearly ten years before you have a 10 per cent deposit on the average UK house price of £228,147.
The maximum government bonus you can get in a year is £1,000 (25 per cent of the £4,000 maximum yearly contribution). If you open your LISA when you turn 18 and contribute £4,000 a year, until you're 50, you could earn up to £32,000 in bonuses. If that hasn't slam dunked it, the biggest unreported benefit is the compounding return on the bonus. The bonus on an HTB ISA was paid only at the point of purchase on completion whereas the bonus on a LISA is paid annually, allowing you growth the next year on the bonus, and growth on the bonus's growth the next year, and so on.
Slight downside: An HTB ISA can start at age 16 and continue, whereas the LISA starts at age 18 and ends at 39.
LISAs are available as a Stocks and Shares ISA as well as a cash ISA allowing flexibility for greater growth and the ability to buy into dips in stock markets over the years. The HTB is just cash.
Early withdrawal from a LISA has been highlighted as an issue as there is a 25 per cent penalty if it isn't for a house purchase before age 60 or due to terminal illness. In reality, this equates to taking the bonus back and is the same as an HTB ISA, as they don't pay the bonus until you actually buy a home.
Unlike an HTB ISA, you can open a different LISA each year, but only pay into one.
Maximum price of a property you can purchase? With an HTB it is £250,000 in the most of the UK, and £450,000 in London. With a LISA, it is £450,000 in the UK.
This is also a great option for grandparents/parents to make Inheritance tax plans. A gift each year to the recipient out of normal expenditure is free from Inheritance tax and assists the dependent whilst attracting 25 per cent per year tax bonus.
A very attractive double tax break.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. Do you have a question on an ISA or any financial matter, please call Darren McKeever on 028 6863 2692, email email@example.com or visit us on www.wwfp.net.