Sarah Laing looks at the benefits of opening a lifetime ISA and flags up an important recent change.
Qualifying individuals are eligible to open a lifetime individual savings account (LISA) in the same way as opening a regular ISA and contribute up to £4,000 each year, with the government providing a 25% bonus on contributions at the end of each tax year up to the age of 50.
Lifetime ISAs are a tax-efficient savings vehicle as there will be no income tax to pay on interest earned and no capital gains tax to pay on subsequent profits arising on the money invested.
Who is eligible?
A ‘qualifying individual’ is generally an individual who:
- is 18 years old or more;
- is under 50 years old (individuals between 18 and 40 may open accounts, but investments may be made up to age 50);
- has not made and will not make any payments into any other lifetime ISA in the same tax year;
- has not exceeded the overall subscription limit (see below);
- has not exceeded the overall lifetime payment limit of £4,000; and
- is UK-resident or has earnings from overseas Crown employment (or is married to or in a civil partnership with a person who has such earnings).
The funds in the account, including the government bonus, may be used to buy a first home worth up to £450,000 at any time from 12 months after opening the account and can be withdrawn from age 60 for any other purpose. Savers are also able to access the funds in their account if they become terminally ill.
Investment limits
Investors may contribute to one lifetime ISA in each tax year, as well as a cash ISA, a stocks and shares ISA and an innovative finance ISA, subject to the overall £20,000 limit. If money is withdrawn from a lifetime ISA, this will not increase the amount that can be paid in during that year.
Where funds or investments are transferred to a lifetime ISA from an ISA of a different type, the value transferred will not count against the overall ISA limit for the year (currently £20,000), but will count towards the £4,000 lifetime ISA limit. This is because ISA transfers from an ISA account that is not a lifetime ISA to a lifetime ISA are treated as current year payments to the lifetime ISA.
Unauthorised withdrawals
Savers are able to access the funds in their account if they become terminally ill. Under the normal rules, most other withdrawals that are made will be subject to a 25% charge of the amount withdrawn, which is deducted by the plan manager and paid to HMRC. For example, if an investor withdraws £1,000 from a lifetime ISA, the withdrawal charge will be £333.33, being 25% x £1,333.33. The funds in the lifetime ISA will be reduced by £1,333.33.
However, to help with the impact of the coronavirus (Covid-19) pandemic, in May 2020, the government announced that the charge for unauthorised withdrawals from a LISA during the period 6 March 2020 to 5 April 2021 inclusive would be reduced from 25% to 20%.
This means that an individual who withdraws £1,000 will be subject to a withdrawal charge of £250, being 20% of £1,250. If a higher withdrawal charge of £333.33 (see above) has already been imposed, the additional £83.33 may be claimed back by the account provider and credited to the account. The effect is that only the government bonus is lost.
On the death of an account holder, the lifetime ISA funds will form part of the estate, but a spouse or civil partner may inherit the ISA tax advantages and will be able to transfer the funds into his or her own ISA in addition to their own allowance (the 'additional permitted subscription’).
Practical tip
Savers are able to save into both a help-to-buy ISA and a lifetime ISA but will only be able to use the government bonus from one of the accounts to buy their first home.
