First-time buyers above £450,000 keep their LISA savings

Since 29 October, a first-time buyer who uses a Lifetime ISA towards a home costing more than £450,000 pays a withdrawal charge of 20 per cent, down from 25 per cent. The Budget on 28 October announced the cut and it took effect the next day. At 20 per cent the charge is designed to take back the government bonus rather than your own money.

Why the old charge took your own money

The Lifetime ISA adds a 25 per cent bonus to what you pay in, up to £1,000 a year. A bonus of 25 per cent on your money works out at 20 per cent of the pot, before any growth. A charge of 25 per cent of the pot therefore took back the bonus and then some of your savings as well.

Illustration, not a real client. Priya rents in Lewisham and has paid £16,000 into a Lifetime ISA over four years. The bonus adds £4,000, so leaving interest aside her pot is £20,000. She is buying a flat for £520,000.

• Before 29 October: a 25 per cent charge of £5,000 would have left her £15,000, which is £1,000 less than she paid in.

• Now: a 20 per cent charge of £4,000 leaves her £16,000, exactly what she paid in.

• Had the flat cost £450,000 or less: no charge, and the full £20,000 goes towards it.

The bonus still only goes to homes within the cap. What has gone is the penalty on top of it. HMRC's Lifetime ISA guidance already shows the 20 per cent rate.

The other rules have not moved

The conditions for a first-home withdrawal still apply. You must buy at least 12 months after your first payment in, buy with a mortgage, and use a conveyancer or solicitor, who receives the money from your provider. Taking money out for most other reasons before you are 60 still costs 25 per cent.

For a buyer above the cap, there is now a cleaner choice. Use the Lifetime ISA, give up the bonus and keep what you paid in. Or leave it alone, find the deposit elsewhere, and draw it from age 60 with the bonus intact. If the purchase works without it, the second route keeps the £4,000.

A new account for new savers from 2029

The Budget also announced a First Time Buyer ISA, due to launch in April 2029 and to replace the Lifetime ISA for new savers. The Budget documents describe a 25 per cent bonus on the account balance, paid on withdrawal and capped at £20,000, for a first home worth up to £450,000. It needs new legislation before launch, so the detail can still change. The Budget documents say existing Lifetime ISA holders will be able to carry on paying in and using their accounts under the current rules.

If you are self-employed

Lenders often ask self-employed buyers for proof of income, and HMRC's SA302 tax calculations are among the documents they may want. They come from your filed tax returns, so a late or muddled return can hold up a mortgage application. Getting your recent returns filed and right is the dull step that matters. How we look after freelancers' tax returns sets out what that involves.

Before you exchange

Check the price against £450,000 first. If you are over it, ask your Lifetime ISA provider what you would receive after the 20 per cent charge, and compare that with keeping the account for later life. The charge is fairer than it was. It is still worth doing the sum before your conveyancer asks for the money.

About the author

Harvey Dhillon is Founder and CEO of Zmartly, an accountancy firm for small businesses. He grew up in West London and began his career in finance at Barclays, in investment banking and wealth management, before going full-time on Zmartly in 2020.

Featured photo by Jakub Zerdzicki on Pexels.