How to buy a home using a Lifetime Isa
Introduced in 2017, Lifetime Isas (Lisa) were targeted towards the younger generation, offering them the dual purposes of saving to fund the purchase of their first home, and funding later life income. To encourage saving, the government offers a bonus of 25% on sums deposited up to a limit of £4,000 per tax year.
In order to discourage people from withdrawing their savings, a charge applies to any withdrawals, unless:
- The withdrawal is to fund a first residential property purchase
- The investor is over the age of 60
- The investor’s health is seriously compromised
- The investor has died.
Originally set at 25 per cent, the withdrawal charge was reduced to 20 per cent for the tax year 6th March 2020 to 5th April 2021 in a bid to help savers during the Covid-19 pandemic.
Who can take out a Lisa?
The investor, the person taking out the Lisa, must be between the ages of 18 and 40. The account will be valid provided the investor has taken out a Lisa account and paid into it by the day before their 40th birthday, with deposits (also called “subscriptions”) continuing until the day before the investor’s 50th birthday. A Lisa can be invested on a cash basis, or stocks and shares.
The investor must be resident in the UK (unless they are a crown employee or the spouse of one), to be eligible to take out a Lisa and pay into it. If the investor moves abroad, they have to stop subscriptions; paying into two different Lisas in the same tax year is also prohibited.
The limit on how much an investor can pay into their Lisa in any one tax year is currently set at £4,000, with the government topping it up by making a 25% contribution to every payment up to this limit. This means that a total bonus of £1,000 is available each tax year if the maximum amount is deposited into the Lisa. The Lisa manager claims the bonus each month from HMRC.
Subscription of new money deposited into a Lisa account is included within the overall Isa allowance, which has been set at £20,000 for 2020-21 and 2021-22 tax years. For example, if an individual has paid £4,000 into a Lisa and they receive a government bonus of £1,000, they can still pay an additional £16,000 into other types of Isa. Perhaps splitting it by paying £6,000 into a Cash Isa and £10,000 into a stocks and shares Isa, for example.
Buying a house
To be eligible for a charge-free withdrawal from a Lisa, an investor has to meet several conditions:
- They are prohibited from having owned a residential property before in the UK or anywhere else in the world. This includes any inherited property or property that has been owned jointly with another.
- It can be a joint house purchase with one or more people and they may also use funds from a charge-free withdrawal from a Lisa to go towards the purchase of a house. There is no requirement that the other parties are first-time homeowners (unless they are planning to use Lisa funds).
- The investors name does not have to appear on the mortgage documents, providing their name is on the title deeds of the property.
- The charge-free withdrawal to buy a first home is only allowed after 12 months has elapsed since making the first payment into the Lisa.
Requirements in relation to the property, include:
- The property must be in the UK. It is prohibited for Lisa investors to use charge-fee withdrawals to help buy property overseas.
- The purchase price of the property must be £450,000 or less. The limit applies to the UK as a whole; there is no differential for properties in London and its surrounding areas.
- The property must be the investor’s only or principal place of residence and must be a residential property. Although, it is possible to use a charge-free withdrawal to fund the purchase of a property that will also be used as an occupational space. For example, where someone works from home; however, this must also include a living space suitable for that purpose.
- A charge-free withdrawal cannot be used to fund the purchase of a buy-to-let property. An exemption applies where the investor is not a UK resident but is a crown employee (or their spouse) serving overseas. In that case, they can temporarily let the property until they return to the UK and occupy it. However, the investor must prove it is their intention to occupy the property as their primary residence.
- A charge-free withdrawal can be used to purchase land for a self-build property.
- The property must include a legal interest in land – this means a charge-free withdrawal cannot be used to fund the purchase of a houseboat, for example.
The amount that can be withdrawn charge-free has to be the amount specified under the purchase agreement and must be less that the purchase price of the property. The purchase has to complete within 90 days of the withdrawal.
If the purchase cannot be completed with the 90 days, the conveyancer can request an extension of 60 days, followed by a further 30-day extension if necessary. Lisa managers must report any extensions to HMRC.
Within this period, the investor can make two or more charge-free withdrawals for the same property. In practice, this can arise where an unpaid bonus has yet to be claimed from HMRC, but the investor needs most of the funds paid to the conveyancer as soon as possible. A further charge-free withdrawal can be made once the bonus has been credited to the account, if the purchase has not completed at that point.
If the investor has multiple Lisas with several different providers, and wants to withdraw funds from each, a new investor declaration and conveyancer declaration must be given for each withdrawal. The investor does not have to withdraw the whole fund; partial fund withdrawals are permitted. If the whole of the Lisa fund has been withdrawn, it does not automatically close the account, Lisas can still remain operational with a nil balance. This is to encourage the investor to re-commence their payments for funding later life income.
Payment to the conveyancer
Funds withdrawn from the Lisa are automatically paid to the conveyancer directly, bypassing the investor. The Lisa manager has 30 days to make the payment after receiving valid declarations.
Both investor and conveyancer must sign declarations which give details of themselves, the Lisa and the property. Despite the Lisa manager releasing funds directly to the conveyancer, it is up to the conveyancer and the investor to ensure they are complying with the requirements for a charge-free withdrawal. It is not within the Lisa manger’s purview to determine whether the individual or the property are valid; they rely on the investor and conveyancer’s declaration to this effect contained within the withdrawal request.
The Lisa manager is not required to take any additional steps to verify the information given within the declarations, or to determine whether that information is correct. They can only prevent a charge-free withdrawal if they have a reasonable belief the information given is incorrect or untrue.
What happens if the house purchase falls through?
If the purchase of the property does not complete with the 90-day period (or 150/180 days if extensions have been applied for) following the funds being transferred to the conveyancer, then they are compelled to return the funds in full to the Lisa manager, who will repay them into the Lisa fund. If there is any shortfall or discrepancy in the sums, then the conveyancer must explain how and why it occurred. A withdrawal charge will be applied to any shortfall.
If any interest has been earned on the funds, these can be returned directly to the investor.
On the occasion of the Lisa being closed following the withdrawal, the investor can open a new account that will accept the returned funds, even where payments have been made into another Lisa within the same tax year or if the investor is no longer resident in the UK.
If, during the intervening period, the Lisa has been transferred to another Lisa manager, then the original Lisa manager must pass on the returned funds to the new manager. Also, where Lisa funds have been returned, the investor can still use a charge-free withdrawal to fund the purchase of another property, provided it is their first purchase and the necessary declarations have been completed.