The Lifetime ISA offers tax-free savings and a Government bonus to help you buy a first home – but read the small print carefully or there could be trouble ahead, warns Kay Hill
A Treasury Committee report on the Lifetime ISA (LISA) released this summer showed that over 1.3 million people have an open account and that since it was launched in 2017, 228,000 people have used LISAs to buy 182,500 homes.
However, the report concluded that the LISA is over-complicated, confusing, and may not be “the most effective way in which to spend taxpayers’ money to support first time buyers”.
With Chancellor Rachel Reeves threatening reform of ISAs in general, it’s possible that the LISA could be in the firing line – so first time buyers are rushing to open one. At Hargreaves Lansdown, for example, last year was the biggest year ever for LISA openings, with an increase of 24% in the number of people paying into one.
Lifetime ISAs certainly offer a sound financial benefit, you can pay in up to £4,000 each year (forming part of the overall £20,000 ISA annual allowance) and the Government pays a 25% bonus. So pay in the full amount and you’ll receive £1,000, in addition to the interest you receive on a cash LISA and possible capital gains on a stocks and shares LISA. However, there are some important bits of small print to note along the way, because failing to follow the rules could mean a hefty Government “unauthorised withdrawal penalty” of 25%.
The Government has collected £213m in these penalties from 286,000 people over the six tax years ending in 2024, with £75m collected in 2023-24 alone, a 39% increase on the previous year. What many people are unaware of, is that the 25% withdrawal penalty means you pay back more than the original 25% bonus, it actually amounts to around 6.25% taken from your original contributions. For example, if you deposit £1,000 into a LISA, you receive a £250 bonus, giving a total of £1,250. If you withdraw the entire £1,250 before the age of 60 and not to buy a first home, you’ll be charged 25% of £1,250, which is £312.50, meaning you’ll only receive £937.50 of your original £1,000.
Here are some examples of LISA restrictions to be aware of…
Personal Eligibility
Age: You can only open a LISA between the ages of 18 and 39. Once opened, you can pay in and receive the bonus only until you are 50. After that, if you don’t buy a first home, your account is effectively frozen until you can take it out penalty-free at 60 (or if you are diagnosed with a terminal illness), although interest will continue to accrue.
Location: If you move abroad for work you are not allowed to open, or pay into an existing LISA, unless you are a “crown servant” such as a diplomat or member of the Armed Forces. The account will continue to accrue interest and you can pay in again when you return.
Status: You don’t have to be a first time buyer to open a LISA as it can also be used for retirement savings. However, a change in status can be expensive if you were intending to use it to fund your first home. For example, if you inherit a share of a residential property anywhere in the world, or buy a holiday home or a buy-to-let, you cease to be a first time buyer and are left with two options: withdraw the money with the hefty Government penalty, or leave it in place until you are 60.
Joint purchases: LISAs are individual. If you are buying jointly and your partner is not a first time buyer, luckily you can still use your LISA to help fund the purchase. If you are both FTBs and both have a LISA, you can use both sets of bonuses to help you buy a single property.
Property Eligibility
Price: One of the biggest criticisms of the LISA is that the price cap of £450,000 has not changed since 2017, during which time average house prices have risen by 30%. In London, the average house price is now £564,000 and The Skipton Group Home Affordability Index predicts that more than 10% of local authority areas in Great Britain will have an average first time buyer price that exceeds the LISA price cap by the end of 2027. LISA funds cannot be used to buy a property costing more than the price cap (even if you are only buying a share of it), other than by withdrawing the money and paying the penalty.
Type: LISA balances can be used to buy new and secondhand freehold or leasehold apartments and houses, or land for a self-build project. However, funds cannot be used for a houseboat, a buy-to-let property, a mobile/park home, or a property overseas, nor for solicitor’s fees or moving costs.
Financial issues
Timing: Your LISA must have been open for 12 months before you buy a first home, otherwise you can only withdraw the money with a penalty.
Funding: You must be buying with a mortgage, not a cash buyer or getting a private loan from relatives.
Multiple accounts: If you have savings in a Help to Buy: ISA as well as in a Lifetime ISA, you can only claim the Government bonus on one of them. It is usually preferable to claim the bonus on the LISA, as you can withdraw money from a Help to Buy: ISA without a penalty (only the loss of the bonus).
Conveyancing issues
Professionals: You must use a conveyancer or solicitor to act for you in the property purchase as the LISA provider will pay the funds directly to them. If you simply close your account or withdraw the money yourself you will pay the 25% penalty.
Deposit: LISA funds can legally be used for your exchange deposit or your mortgage deposit (unlike Help to Buy: ISA which could only be used for the mortgage deposit). Timeframes can be a problem, however. Many developers require buyers to move from reservation to exchange in a few weeks, and it can take 30 days for all of your bonus to be available to withdraw from a LISA.
Completion: Once you have handed over LISA funds to a seller or developer as an exchange deposit, completion must follow within 90 days (or 180 days with an official extension). If completion doesn’t occur within 180 days, or the entire purchase falls through after the exchange deposit has been paid, the full amount must be returned to the LISA account or the 25% penalty would be incurred. Because of this financial risk, some conveyancers have a policy of not accepting LISA funds for exchange deposits, especially off-plan, although they will attempt to negotiate a lower exchange deposit that can be paid from other funds. Be sure to check this before appointing your legal team.
What does the future hold for the LISA? While it’s likely that changes will not affect current LISA savers, Chair of the Treasury Committee, Dame Meg Hillier, suggested reforms are likely, “The Committee is firmly behind the objectives of the Lifetime ISA, which are to help those who need it on to the property ladder and to help people save for retirement from an early age. The question is whether the Lifetime ISA is the best way to spend billions of pounds over several years to achieve those goals. We know that the Government is looking at ISA reform imminently, which means this is the perfect time to assess if this is the best way to help the people who need it.”
First Time Buyer is an exciting bi-monthly glossy which takes a stylish and comprehensive look at all the options available, setting them out in an entertaining and informative way, and helping potential customers navigate their way through what is often a daunting and complex process. We dispel the myths, reinforce the facts and arm the reader with the tools necessary to make their homeownership dreams a reality.
