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Using a Lifetime ISA to buy a home
Conveyancing help and guides
25 March 2021

Using a Lifetime ISA to buy a home

Daniel Strieff

Saving for your first home is one of the most important ways a young adult can invest in their future.

But it can be daunting to decide which approach offers the most safety, security, and return on savings.

Recently, the Lifetime Individual Savings Account (ISA) has emerged as an attractive option for savers, so let’s break down what it is, what it isn’t, and whether it can help you get onto the first step of the proverbial property ladder.

What is a Lifetime ISA?

The government launched the Lifetime ISA in 2017. It’s a tax free savings account meant to help young adults buy their first home or save for retirement.

You can deposit up to £4,000 a year into a Lifetime ISA. The government then pays an annual ‘bonus’ of 25% on any contributions you make.

That means you could get as much as £1,000 a year for free towards your home purchase.

Eligibility for opening a Lifetime ISA

Anyone can open a Lifetime ISA as long as they are:

  • Between ages 18 and 39
  • A UK resident (or a military service member based overseas or their spouse/civil partner)

Account holders can make deposits each tax year until age 50. No more payments can be made after that point, though the account can stay open.

You can open more than one Lifetime ISA, but you can only open one per tax year and pay into one per tax year.

Claiming your Lifetime ISA bonus

The government bonus is claimed by your Lifetime ISA manager and added to your account every month. You don’t need to claim it yourself.

Your bonus, which can also generate interest, is based on payments you make into your account from the 6th of the month to the 5th of the following month.

How to use your Lifetime ISA to buy your first home

Buying a house is the real purpose of opening a Lifetime ISA for most people.

Once your account has been open for at least a year, you can withdraw funds tax free in order to buy a home up to £450,000.

The property you’re purchasing must also:

  • Be in the UK
  • Be the first, and only, home you own
  • Be where you intend to live
  • Be purchased with a mortgage.

As long as the above criteria are met, your withdrawal will be exempt from charges.

Read more on our blog: How to improve your credit score and secure a mortgage

But don’t just withdraw money from your Lifetime ISA, because doing so will incur a charge.

Instead, work closely with your conveyancer and your Lifetime ISA provider.

You’ll need to sign an investor declaration form (you can see an example here), which you can obtain from your Lifetime ISA provider.

You’ll then submit your completed investor declaration form through your conveyancer, which will permit you to withdraw from your Lifetime ISA to buy your home.

Your money is usually transferred within 30 days from when your Lifetime ISA provider receives the completed forms from your conveyancer.

How to use your Lifetime ISA to buy a home

Your Lifetime ISA funds can be used at any stage of your property purchase.

Home buyers frequently put the funds towards the exchange deposit. In order to do so, the purchase must be completed within 90 days of your conveyancer receiving your funds from your Lifetime ISA manager.

But your conveyancer can write to HMRC for an extension if it’s taking longer than 90 days to complete your property purchase.

Using the Lifetime ISA to buy a home with another person

If you’re purchasing with another first time buyer who also holds a Lifetime ISA, then both of you can use your ISA and bonus towards the sale.

If the other person isn’t a first time buyer, you can still use your Lifetime ISA, though they won’t be able to use their own Lifetime ISA.

Lifetime ISAs can also be used towards buying shared ownership properties.

However, the total price of the property, including both your share and the remaining equity, must still be under £450,000.

Using the Lifetime ISA for other purposes

If you don’t use your Lifetime ISA to buy your first home, you can only withdraw funds without incurring a charge in either of the following situations:

  • You become terminally ill
  • From the age of 60

In any other circumstance, however, your withdrawal will incur a hefty 25% fee.

(Due to the financial strains caused by the coronavirus pandemic, the government temporarily reduced the withdrawal penalty to 20%, but it snaps back to 25% after 5 April 2021.)

Lifetime ISA contributions count towards your overall limit

Any contributions you make towards your Lifetime ISA count towards your overall ISA limit, which is the maximum amount you can save into all of your ISAs combined in any given tax year.

For the 2020/21 tax year, for example, the overall ISA limit is £20,000.

Lifetime ISAs vs. Help to Buy ISAs

Lifetime ISAs are similar to Help to Buy ISAs in that they’re both designed to help first time home buyers and they effectively offer government top up bonuses of 25% on savings up to certain limits.

However, Help to Buy ISAs are now closed to new applicants. Existing Help to Buy ISA account holders can continue to save into their accounts until November 2029 and claim their bonus for an additional year after that.

Help to Buy ISAs tend to offer a bit more flexibility, though Lifetime ISAs give quicker and larger bonuses.

Other important differences between Lifetime ISAs and Help to Buy ISAs include:

  • Savings amounts

With a Lifetime ISA, you can save up to £4,000 a year. With a Help to Buy ISA, by contrast, the maximum savings level is £2,400 a year (£3,400 in the first year).

  • How and when the bonus is paid

With a Lifetime ISA, your top up bonus is paid monthly. That means it can be used towards the deposit on exchange of contracts (in England, Wales, and Northern Ireland). But with a Help to Buy ISA, your bonus can only be collected between exchange of contracts and completion. As a result, it can be used towards your overall or mortgage deposit, but not at exchange.

  • Withdrawal charges

With a Lifetime ISA, a withdrawal before age 60 for any reason except for a first home purchase or terminal illness incurs a 25% government charge. With a Help to Buy ISA, on the other hand, there are no extra charges on other withdrawals -- but bonuses are only paid for first home purchases.

  • Home purchase price

With a Lifetime ISA, the maximum property price is £450,000 anywhere in the UK. With a Help to Buy ISA, the home you’re buying can only have a price up to £250,000 (£450,000 in London).

You’re also permitted to transfer your Help to Buy ISA into a Lifetime ISA, though those funds will count towards your yearly Lifetime ISA limit.

Read more on our blog: How long does it take to buy a house

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