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I am researching the help-to-buy ISA scheme. The average variable rate is set on 2% for most banks, however some banks offer extra but they put a further condition on it that you cannot hold an additional cash ISA which I believe is what is referred to as an "split ISA". Most banks offer it, but a few banks forbid it and instead offer an increased rate. Now my question is:

Can I open a Htb ISA for myself and open an ordinary cash ISA for a friend/sibling and pay into their ISA, wait till I am ready to buy my house, withdraw my money from the HtB ISA to receive the government's bonus and the additional rate and then ask the said partner to withdraw my money from their account and hand it to me? This way I would be able to take advantage of the additional rate on the HtB accounts but am also able to invest the rest of my saving in another ISA.

Is there any legal problem with this scenario?

And if there isn't, what is the motivation for the banks to disallow split ISAs if it can be bypassed in this way?

  • 1
    Just to clarify, as someone else looking at such ISA's, the H2B ISA has a stipulation attached that you cannot have another cash ISA, this is not a bank requirement but a condition of the H2B ISA. The banks offering split ISA's are manipulating loop holes. moneysavingexpert.com/savings/help-to-buy-ISA point 8 discusses these alternative providers – nickson104 May 16 '16 at 9:36
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Getting someone else to save for you with their ISA allowance has some quite significant disadvantages:

  • You'll be using up their ISA allowance, so they won't be able to make their own tax-free savings. Perhaps you know someone who doesn't want to use it anyway and is happy to do this, but most people probably don't.

  • You are essentially handing them the money and relying on them to voluntarily give it back to you when the time comes. Even if you trust them to do this, if they have financial problems in the meantime then their creditors would be able to go after the money in the ISA, and would have an equal or better claim to it that you would.

  • When the money is returned to you, you would become liable to tax on the interest anyway. From the perspective of your own tax situation, it's extra income to you that wasn't protected by any ISA allowance of yours. While in practice you might be able to get away with not declaring it to anyway and not be detected, it would still be illegal tax evasion and thus rather risky.

So overall it's not really a very effective "bypass" for whatever restriction a bank wants to impose on your ISA holdings.

  • Thanks. That makes it clearer as to why banks are not worried about it. As for the points you raised, 1) I am thinking of my younger siblings. They are in university so no income and hence no ISA contribution. 2) Your points about trust issues and financial reliability are valid. 3) why would there be a tax on the interest? ISA is tax free so no tax on the financial "partner" and as for myself, there is no gift tax, right? My understanding is that gift is not considered income. Am I wrong? – shu May 15 '16 at 11:46
  • @shu: It wouldn't really be a gift though, it would be related directly to the money being invested. I don't know how HMRC would view it if they knew the full circumstances. Also if your siblings are at university, make sure the savings wouldn't affect their entitlement to various sources of funding - e.g. things like extra maintenance loans, free NHS dental treatment. – Ganesh Sittampalam May 15 '16 at 12:24
  • Good point about the financial aid entitlements. I will have a look. As for your point about it not being a taxable investment, I don't see why you would say that. There are two acts of gift on both sides. as the donor, I am not involved with any "investment". The recipient is, but it's a tax free investment for them and they would give up the money they have made through a gifting process which is also tax free. – shu May 15 '16 at 12:58
  • A gift has to come with no expectations - whereas you would be "giving" money to your sibling in the expectation of receiving that money+interest back later. – Ganesh Sittampalam May 15 '16 at 13:26
  • well yeah but it's not a legally binding contract as such. As you pointed out yourself, they can still run away with the money without me having any claim to the it, or like you said run into trouble with finances. So there is no legal "expectation" and safeguard. – shu May 15 '16 at 13:48

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