Lifetime Isas (Lisas) were introduced in April 2017. They were targeted at younger generations offering the dual purposes of saving to fund buying a first house and saving to fund later life income.
To help encourage people to save, the government gives a bonus of 25 per cent on subscriptions of up to £4,000 a tax year paid to a Lisa. However, to discourage people from withdrawing their savings before achieving their saving objectives a charge applies to withdrawals, unless:
- it is to fund a first residential property purchase;
- the investor is over 60;
- the investor is in serious ill health; or
- it is on death.
The withdrawal charge was originally set at 25 per cent but was reduced to 20 per cent for the period 6 March 2020 to 5 April 2021, to help savers during the Covid-19 outbreak.
This withdrawal charge claws back the government bonus given on subscriptions, plus investment growth on that bonus.
However, the 25 per cent charge – which applies again from 6 April 2021 - also claws back an additional amount set to act as a disincentive to people taking their funds and not using it as a longer-term savings plan.
In 2018/19 - the most recent tax year we have statistics for - 223,000 Lisas were subscribed to. The average subscription for that tax year was £2,709. A Lisa can be invested on a cash basis or a stocks and shares basis.
Who can take out a Lisa?
Someone taking out a Lisa has to be at least age 18 but younger than age 40. For the account to be valid the investor has to both take out an account and pay into it by the day before their 40th birthday. Payments can continue until the day before the investor’s 50th birthday.
The investor has to be resident in the UK (unless they are a crown employee or a spouse of a crown employee) to take out a Lisa and to pay into a Lisa. If they move abroad, they have to stop subscriptions.
Investors cannot pay into two different Lisa in the same tax year.
There is a payment limit on how much an investor can pay into a Lisa of £4,000 each tax year. The government will add a 25 per cent bonus to every payment up to this limit, meaning a total bonus of £1,000 is available each tax year. The Isa manager claims the bonus from HMRC every month.
Generally, subscription of new money paid into a Lisa is included within the overall Isa allowance, which is £20,000 for the 2020-21 and 2021-22 tax years.
For example, if Harry pays £4,000 into his Lisa ISA, he will also receive a government bonus of £1,000. He can then pay up to £16,000 into different types of Isa – say £10,000 into a Cash Isa and £6,000 into a stocks and shares Isa.
House purchase – the buyer
If an investor wants to use a charge-free withdrawal from a Lisa to fund the purchase of a house, then they have to meet several requirements:
- They cannot have owned a residential property before in the UK or elsewhere in the world, including any property they may have inherited or jointly owned with someone else.
- It can be a joint house purchase with one or more other people. The other parties can also use the funds from a charge-free withdrawal from a Lisa to fund the purchase of the house. There is no requirement that the other partners are first-time house owners (unless they are also planning on using Lisa funds).
- The Lisa investor’s name does not have to appear on the mortgage paperwork, as long as their name is on the title to the property.
- The charge-free withdrawal to purchase a first home is only allowed once 12 months has elapsed since the first payment into the Lisa.
House purchase – the property
The requirements that must be met for the property include:
- The property has to be in the UK; investors cannot use charge-free withdrawals from Lisa to help buy overseas property.
- The property purchase price has to be £450,000 or less. This limit applies to all of the UK; there is no differential for property in the London area.
- The property has to be a residential home and it has to be the only or main place where the investor will live. It is possible to use a charge-free withdrawal from a Lisa to fund the purchase of a property that will be also be used as an occupational space – for example where the individual works from home – as long as this is where the person is living and it is suitable for that purpose.
- The property cannot be a buy-to-let. When a Lisa investor is not a UK resident but is a UK Crown employee serving overseas, or their spouse or civil partner is a UK Crown employee also serving overseas, they can temporarily let their property until they return to the UK and can occupy the property. It must still always be the intention of the investor to occupy the property as their main residence.
- The rules allow the charge-free withdrawal to be used to buy land for a self-build property.
- The property has to include a legal interest in land – so the Lisa charge-free withdrawal could not fund the purchase of a houseboat.
- The property must be bought with loan taken as charge over the property, such as a mortgage. This cannot be a buy-to-let mortgage.
Withdrawing money to buy a house
The amount that can be withdrawn charge free has to be the amount specified under the sale and purchase agreement. It must be less than the purchase price of the property.