Why the Lifetime ISA is not a simple to understand product

I’m gonna be upfront here, this is going to be a bit of a rough and ready post. It’s incredibly one-sided. But hopefully, I’ll be coherent to persuade you of one thing: the Lifetime ISA is a complex and confusing product.

The Lifetime ISA was drawn into the firing line after the Treasury Committee recommended it’s abolition (link). Some far smarter, wiser and more experienced people have made the case that the Lifetime ISA is a complex and confusing product. Most notably, former Pensions Minister Ros Altman (link).

Arguably, the most ‘no-brainer’ case for using a LISA is for those who are funding a house purchase. But even for these people the case is not as clearly made out as you’d think. Here are some reasons why.

Inheritance

Do you have parents? Grandparents? If you inherit a share of a family home sometime in the future that will block you from using the LISA towards your house buy.

Can you plan for that? No way, well except to get yourself written out of the will.

Joint ownership

If more than one Lifetime ISA investor is jointly purchasing a residential property, then each person must satisfy the Lifetime ISA requirements. Lifetime ISA investors can purchase a property as a joint owner with a person who already owns the property, but this is also subject to the conditions of the Lifetime ISA being satisfied.

Occupation

You have to intend to live in the property as your only or main residence. How long that’s for, nobody knows. Living there part-time, no idea. Got an overseas holiday home, no clue.

Helpfully, the government never set it out any more on this in the legislation. So if you’re an NHS worker, or regularly have to move jobs, you might find yourself on the wrong end of this. I’d like to give you some certainty, but nobody appears to know if the government will whack you with a penalty if you do end up leaving the home unoccupied. I’ve searched fruitlessly. If any wise owls out there know the answer please let me know!

Buy to let

Buy to let is therefore excluded. But there is a loophole to that. If you’re a crown employee serving overseas then you don’t have to take immediate occupation. In the meantime, you can buy to let until you return. Although, it’s not precisely clear what happens if you have to live on base on your return. The guidance notes and the legislation don’t seem to quite match.

There’s a cap

The house purchase price must not exceed £450,000. Good luck with that in London or South East England.

Also, there’s no mechanism in the legislation for that limit increasing. So, you’re gonna have to rely on a future government tinkering with the legislation for any increases. Otherwise, you’ve got to there’s a future reverse in house prices.

The cap applies even for share ownership

Want to buy 25% of a £500k flat in London (i.e. £100k purchase price)? You’re not allowed, the cap applies on the whole value, not just your share. So that probably rules out the savvy people co-purchasing their first homes in London.

You have to take a mortgage

Yep, you can’t buy the home outright. You can only use the LISA for a house purchase if you fund the purchase through a loan (mortgage) or under a home purchase plan.

You can only use it against the purchase price

You can’t use it against any solicitors fees, mortgage fees, stamp duty or anything else. Only the purchase price. So you’re gonna have to still save up a fair whack in another account to be able to pay all your purchase costs. That’s still better than the disastrous help to buy ISA which blocked you from using the funds on the exchange deposit!

Got a help to buy ISA?

You can have both a help to buy ISA and a LISA. But you can only use the funds from one. However, you can transfer from a help to buy ISA into a LISA if you want.

In a chain?

Watch out – because you’ve got 90 days from when you’ve withdrawn the funds to complete. Otherwise, you’ve got to put the money back. You can ask for an extension, but there are no guarantees. Hopefully, your chain won’t break. That never happens right?

Got a caravan?

Yeah, you might not qualify. Seriously. (link)

References:

Legislation: https://www.legislation.gov.uk/ukdsi/2017/9780111154618/pdfs/ukdsi_9780111154618_en.pdf

Government’s conveyancer guidance: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/691773/conveyancer__1___5_.pdf

Gov.uk Conveyancers technical guidance: https://www.gov.uk/government/publications/conveyancers-lifetime-isa-technical-guidance/conveyancers-lifetime-isa-technical-guidance

 

p.s. I know I’m being intentionally pernickety, it’s not all as bad as I’ve made out here. But, these rules do exist. And you do need to think about them. I know lots of you readers are very financially savvy, many savvier than me! But, do I think the average 20 year-old will get all this? No chance. But they need to if they want to use a LISA to fund their future first home. And what happens when potential savers or investors are faced with unnecessary complexity – they don’t save, they don’t invest. We need products that encourage people to save. They need to simple and accessible. They need to be easy to understand and usable in financial planning.

That doesn’t mean the LISA is a bad product – in fact, the generosity of the bonus is unbeatable for many people. That’s what makes this all the more frustrating. This is a product that could help so many people. But the implementation is so poor. And we’re not just talking complexity like forecasting life-expectancy for pensions is complex. We’re talking about complicated legislation that even lawyers need guidance to understand. Good luck to the rest of us!

Comments

  1. The inheritance rule is harsh, as I can see brothers and sisters inheriting a house, but neither having the funds to buy the other out without using their LISAs, so the house would need to be sold and the proceeds split. Hopefully once these cases occur the rules will be tweaked. The rest of the restrictions seem reasonable to me.

    1. Hi John. I agree, none of the rules on their own are ‘dumb’. They’re all there for good reasons; even the inheritance one. Though I also agree that it’s harsh. I just think it’s too much. A bit like the inheritance tax rules.

      I mentioned this on twitter, but I’d get done on the inheritance rule (I bought my house with Mrs YFG before LISAs came in anyway). My old man owned a shop with a bedsit above it. When he passed away I inherited a share with my sister and mother. It wasn’t worthless, but a run down shop in a run down town on a run down backstreet don’t fetch much. Anyway, it’d probably put me offside in using a LISA towards a home.

  2. I think that for buying a house the LISA is a terrible idea.  So many things to consider that the average buyer may not take the time to understand.  I had a family member buy a house recently but not use his LISA – probably because it was too complicated.

    The problems the government has with housing won’t be solved either.

     

    But for a retirement investing vehicle, the LISA is a good product for me and for those who can afford £4,000 a year and don’t need it until 60.  The advantage of having a 25% bonus on the way in and no tax on the way out is very appealing to me and I hope that they keep the LISA for as long as possible for me.

    1. Hi! Thanks for dropping by and leaving a comment.

      I think the LISA works well if you’ve got some good plans and have things mapped out well. For those who’ve had their Lifetime Allowances and Annual Allowances decimated, the LISA is very attractive. I’m disappointed that it’s not open to people over 40 or that you can’t put any more in after 50. For a lot of people, that’s gonna be the kind of age where they are going to be able to start putting serious amounts away for retirement. I know there are good reasons for those limitations – but I firmly believe we’ve got to encourage people to save and invest more!

      1. I think that the LISA is good for me (mid 30’s) but a terrible scheme overall – it really benefits those who don’t need it and randomly equates a house with a pension and only for the under 40s until they are 50.
        But make hay while the sunshines I say. It’s an other arm of a FIRE portfolio.

    2. I’ll second that – I understand that for the first time purchase use it may be confusing, but as a retirement savings vehicle, it is a very simple and good product..as long as it is used in conjunction with a SIPP and if you are a basic rate payer, then the Lisa trumps it… tax free in tax free out… wonderful….shame it is capped at 4K per year…

      1. It is rather a shame it is capped at 4K a year. I can’t remember whether there was a stated intention to increase the cap towards the overall ISA limit over time. As it stands, the Government would only pay out a maximum of £32k in bonus for someone, which is small fry compared to a pension saver maxing their Annual Allowance. Still, it’s very generous tax relief.

          1. Quite right QT. Plus pensions now have the extra benefit of being Inheritance Tax free. In the past you’d want to draw out of your pension as quickly as possible, now it’s the other way around. As you mention above, in that respect LISAs are a good compliment to SIPPs.

          2. The difference is that the LISA is tax free on the way out. A sipp will.be taxed at your marginal rate less your tax free element of 25%. You can of course use both, either or neither – choose what’s best for you.and your situation

  3. Re the inheritance rule: if property in an estate is sold and distributed as cash (ie the beneficiaries don’t have the house transferred to their ownership at any point) then presumably you don’t fall foul of the IHT rules?
    Also (since you’ve read the rules!) re cash purchase. Suppose a couple want to buy a property with a joint mortgage. One of them has enough cash to buy their share, and the other doesn’t. Presumably this would be ok too? They could both use LISAs? You’d just be taking out a smallish mortgage together….
    I tend to agree though, LISA makes more sense as a retirement vehicle and not for house purchase. Mainly because investment strategies for the two are (or should be) very different.

    1. Hi Red Kite, very good questions.

      As I understand, from speaking to a solicitor and from my interpretation of the rules, if the estate is sold and distributed then you should be OK. I believe the key is whether you have the right and ability to use the inherited property as your residence. If the property is sold before legal ownership is transferred then you should be in the clear. It’s not obvious though, the relevant definitions in the legislation are:

      “residential property owner means an individual who owns as sole or joint owner an interest in residential property (including a legal interest in land acquired under the terms of a regulated home purchase plan or a shared ownership arrangement) which is— [freehold, leasehold or common hold]

      and:

      “residential property means a legal interest in land which comprises a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use”

      On the second question, I believe you are right on that as well. The legislation only says that the purchase has to be made with a mortgage. So it seems to follow that if you are buying jointly then as long as a charge is registered on the purchase you are fine.

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