Retain HTB Cash ISA & Transfer Lump Sum To Lifetime Cash ISA Each Tax Year - Is It Possible?

ZEN1TH

I already own a property so will not be eligible for the government bonus on my HTB ISA. I opened the HTB ISA prior to purchasing a property and am still contributing the maximum £200 p/month into the HTB ISA; just using it as a savings account since it pays higher interest than elsewhere.

Having held a HTB ISA since launch the size of my HTB ISA pot now sits at around £14,300.

This tax year I will have used my entire £20k ISA allowance having contributed £2400 (@£200 p/month) into the HTB Cash ISA + a £17,600 lump sum into a S&S ISA.

The HTB ISA I hold is changing terms to begin capping the interest paid on amounts up to £12k at the end of March this year and it seems that most of the other HTB ISA offerings are following suit.

So my question is would I be able to transfer £4000 from my HTB ISA balance into a LISA (Cash variant) I already have (opened the LISA with a minimal balance several years ago) within the current 2020-21 tax year? Thus bringing the balance on the HTB ISA down to around the £10,000 mark and thereby ensuring that the entire balance will remain earning interest.

Could I then continue contributing to the HTB ISA throughout the next tax year to maximise interest earned and repeat this transfer from the HTB into the LISA the following tax year? Assuming I continue max contributions of £200 p/month the HTB ISA would grow by £2400 p/year while earning some interest and I would then transfer a lump sum into the Lifetime Cash ISA towards the end of each tax year to keep the HTB ISA balance within interest earning territory.

Is this a feasible approach?

masonic

You are not permitted to keep a HTB ISA after becoming a property owner. You need to declare that you are still eligible to hold a HTB ISA each tax year, so the only way to do as you suggest is to make a fraudulent declaration. HMRC would be at liberty to void your HTB ISA at any stage should it come to their attention you are not eligible to hold it. The ISA provider would probably not be very happy with you either, it is the sort of thing that might lead them to end their relationship with you, although I wouldn't have thought such actions would be taken unless someone breaks the eligibility rules across multiple tax years.

You can certainly transfer £4k from the HTB ISA to a LISA. You could also transfer out the remainder to a cash ISA or another type of ISA you are eligible to hold.

I'm a bit confused why you would be interested in a cash LISA if you are using it for retirement. It would be more appropriate to hold investments in a S&S LISA.

Alexland

Masonic is spot on - you are not eligible to still hold the HTB ISA and a cash LISA would be unsuitable for saving until age 60+ as the interest rate is likely to spend most of it's time below inflation. Essentially you would be gradually burning your bonus on the reduced spending power - not a good use of your or the government's money.

If you want to use a LISA for age 60+ it would make sense to use the S&S type from a low cost provider such as EQi which allows you to buy sensible investment funds whose return is highly likely to beat inflation over the long term. Although before doing that consider if you have pension options that could be even more efficient such as getting more employer matching or avoiding higher rate tax depending on your circumstances.

ZEN1TH

Thank you both.

Interestingly the provider of my HTB ISA is also my mortgage provider and when I transferred the HTB ISA to them the agent I spoke with stated that as a homeowner you won't be eligible to receive the government bonus but can still retain the account.

Only reason I steered away from going the S&S LISA route is that I wasn't sure whether it would be treated as a separate entity to the standard S&S ISA I have already made a contribution in this tax year. If I am able to transfer £4000 from the balance of my HTB ISA into a S&S LISA this tax year alongside the S&S ISA I have already contributed into then I will look to go with that option. It would after all be in the form of a transfer from an existing ISA and not classed as a new contribution I suppose and therefore should not be a factor.

eskbanker

Ignore the inaccurate information relayed by an underpaid and underinformed customer service agent, the HTB ISA scheme rules are clear that you're no longer eligible for the scheme once you own a property.

And yes, a Lifetime ISA is a separate type of ISA from others, such as S&S, so you can pay into both even if not transferring.

masonic

ZEN1TH said:

Interestingly the provider of my HTB ISA is also my mortgage provider and when I transferred the HTB ISA to them the agent I spoke with stated that as a homeowner you won't be eligible to receive the government bonus but can still retain the account.

Hmm, it seems you've received some incorrect advice that has worked in your favour to this point. The provider is the main loser in this situation as they will be paying you a higher rate of interest than you'd otherwise be able to obtain, and I presume you wouldn't have a tax liability on this interest even if HMRC came along and voided the ISA. They ought to have been sending you a letter once per tax year reminding you of the HTB ISA eligibility criteria, and that your continued use of the account is subject to you still meeting the criteria. Although you have been lucky in acting on that incorrect info up to now, it would be wise not to push your luck.

ZEN1TH said:

Only reason I steered away from going the S&S LISA route is that I wasn't sure whether it would be treated as a separate entity to the standard S&S ISA I have already made a contribution in this tax year. If I am able to transfer £4000 from the balance of my HTB ISA into a S&S LISA this tax year alongside the S&S ISA I have already contributed into then I will look to go with that option. It would after all be in the form of a transfer from an existing ISA and not classed as a new contribution I suppose and therefore should not be a factor.

A LISA, whether cash or S&S, is a separate type of ISA, so you can contribute new money to both a S&S LISA and a S&S ISA in the same tax year. If transferring previous year money from a HTB ISA (which a cash ISA), then the transfer would be completely disregarded when considering which types of ISA you had paid into in the current tax year, as you say, although it makes no difference in this situation where the two ISAs receiving money are different types. Where it does make a difference is in the overall ISA allowance, since the transfer from HTB ISA to S&S LISA will allow you to contribute the full £20k allowance to your S&S ISA in addition to the £4k transferred to the S&S LISA.

Option 2 is transfer £4k to a S&S LISA, the rest to a S&S ISA, then split your future contributions between the S&S LISA and S&S ISA as you see fit. Not only does this get you back into a safe position with regard to the ISA rules, it is also the option likely to achieve the best returns over the long term.