Lifetime ISA (LISA)
What is it?
Lifetime ISAs (also known as LISAs) are a new type of ISA designed to help people aged between 18 and 40 save up for their first home, or retirement. A LISA lets you save up to £4,000 per year. At the end of the tax year the Government will top up your ISA with a 25% bonus. You will be able to earn a 25% bonus on your LISA contributions up until the age of 50.
Any money you put into your LISA will be included as part of your annual ISA contribution limit.
Tax-free funds, including the government bonus, can then be used to help buy a first home worth up to £450,000 at any time from 12 months after first saving into the account. Funds, including the government bonus, can be withdrawn from the LISA from age 60 tax-free for any purpose. LISA holders can also access their savings if they become terminally ill. Withdrawals at any time for other purposes can be made but a 25% government withdrawal charge will be applied.
The government will provide a bonus of 25% on all contributions to a LISA within the limits. The bonus will be paid only on the amount paid in, and not on any interest or investment growth. This means that if you invest £4,000 in a year, but after investment the pot increases or decreases before the claim is made, you will still receive a bonus of £1,000.
The relevant ISA Manager will claim the bonus from HMRC and pay this into your LISA. Managers will not be required to hold government bonus payments separate from other LISA funds or invest them differently. There will be no statutory minimum size of bonus that a provider can claim. ISA managers will submit claims each month and the bonus will then be paid on a monthly basis.
Where contributions that have not yet received a bonus are withdrawn, the ISA Manager will still be able to claim a bonus on the contributions in the same way as if the funds had not been withdrawn.
To be eligible to invest in a LISA, you must be aged 18 or over but under 40 at the time the LISA is opened. You must also be either:
- Resident in the UK
- A Crown Servant (for example a diplomat or civil servant)
- The spouse or civil partner of a Crown Servant
Lifetime ISAs can hold cash, stocks and shares qualifying investments, or a combination of both.
You can save up to £4,000 per tax year, and can continue to pay into it until you reach 50. The account can stay open after then, but you can’t make any more payments into it.
Your savings will be kept on a tax-free basis for as long as you keep the money in your LISA.
If you cease to be eligible to invest in a LISA, any existing ISAs will continue to be exempt from UK tax, but future contributions to regular investment ISAs must be terminated and no further single contributions may be made.
You will be able to contribute to one LISA in each tax year, as well as a cash ISA, a stocks and shares ISA, and an Innovative Finance ISA, within the overall ISA limit of £20,000.
The current LISA maximum contribution limit is £4,000.
The overall maximum contributions to ISAs is £20,000.
Any investment returns received will be tax free.
There is no personal tax on any income taken and no capital gains tax on any gains made.
The value of your LISA and other ISAs will be included in your estate for Inheritance Tax purposes on your death (ISAs invested in shares listed on alternative investment markets may qualify for up to 100% Business Relief).
The spouse or civil partner of a deceased LISA holder will have an Additional Permitted Subscription (APS) equal to the amount held in all their ISAs, including the LISA, at death (including any government bonus in the LISA). The money will no longer be inside a LISA wrapper, so no government charge will apply on withdrawals. If the individual chooses to do so and is eligible, they will be able to pay up to £4,000 per annum of this into their own LISA subject to the normal subscription criteria.
The value of the inherited ISA allowance will normally be the higher of the total value of the ISA savings at the date of death or the value on the date the ISA savings stopped being exempt from UK Income Tax.
ISA savings stop being exempt from UK Income Tax when the first of the following occurs:
- The administration of the estate is completed
- The account is closed, or
- Three years after death
So, if a LISA holder were to die, leaving a LISA valued at £30,000 at the date of their death or when the ISA savings stopped being exempt, their spouse or civil partner will be entitled to an additional ISA allowance of £30,000. £4,000 of this can be used to contribute to their own LISA but this can only be used in place of their own contribution, not in addition to it. The remaining £26,000 can be paid into an ISA in addition to the annual ISA subscription (£20,000 2021 /22). Where a cash subscription is paid, the spouse or civil partner has 3 years from the date of death to use this or if later, 180 days from the completion of the administration of the estate.
Where the LISA assets are left to someone else in their will or are used to meet expenses from the estate, the spouse or civil partner is still entitled to the additional allowance and this cannot be claimed by anyone else even if they received assets from the LISA.
The surviving spouse or civil partner can use the additional allowance to top up an existing LISA / ISA or open a new LISA / ISA with a LISA / ISA Manager of their choice.
All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change.
You can withdraw the funds held in your LISA before you’re 60, but you’ll have to pay a withdrawal charge of 25% of the amount you withdraw.
If you transfer your LISA to a different type of ISA, you’ll also have to pay a withdrawal charge.
A withdrawal charge won’t apply if you’re:
- Using it towards a first home
- Aged 60
- Terminally ill with less than 12 months to live
- Transferring to another LISA with a different provider
If you die, your LISA will end on the date of your death and there won’t be a withdrawal charge for withdrawing funds or assets from your account.