31 Mar 2018
Author: Stephen Breen
If you opened a Lifetime Individual Savings Accounts (LISA) last year, you may be aware that from 6 April 2018, your savings together with the Government bonus can be withdrawn to fund the purchase of your first home. With this date on the horizon, we look at some of the legal issues of buying with a LISA.
LISAs – a quick introduction
- You can open a LISA if you’re aged 18 to 39.
- LISAs can be used for purchasing your first home or as a pension.
- You can contribute up to £4,000 a year, regularly or in lump sums.
- The Government adds 25% to your savings.
- The bonus is paid for the first year in April/May 2018, after which it is paid monthly.
- You can invest in stocks and shares.
- The maximum price for your first home is £450,000.
- You can’t use the funds until the LISA has been open for 12 months.
- If you withdraw for any other purpose than your first home/pension, there’s a 25% penalty.
If you’re buying with a partner and they are also a first time buyer, they may have opened their own LISA to maximise the size of bonus available on your savings.
If, however, your partner has previously owned a property, they won’t have been able to open a LISA of their own. Fortunately, this doesn’t stop you from using your LISA towards a joint purchase with them.
If you’re buying with additional people, there’s no limit to the number of people who can use a LISA to contribute (provided that they are all first time buyers and meet the other LISA criteria). So, for example, if you and your two siblings are all first time buyers and each have a LISA, there is nothing to stop you all putting your LISA funds towards the purchase of a single property. Each contributor gets the 25% government bonus on their individual LISA savings.
You can also use your LISA to ‘buy in’ to a property that is already owned by another person (such as your partner), provided that the conditions of the Lifetime ISA are satisfied.
Calculating the £450,000 price cap
The purchase price on properties bought with a LISA is capped at £450,000. For most purchases, this is calculated simply as the value to be paid under the contract with the seller, excluding the cost of any fixtures and fittings.
Where the property is already owned by someone (for example, your partner) and you are buying in, the value is the market value of the whole of the land as determined at the time of the acquisition.
Shared ownership properties
You can use your LISA to purchase a shared ownership property (i.e. where you purchase 25%, 50% or 75% of a property and rent the remaining share until you are ready to buy it). This is possible, provided that the conditions of the LISA are met, together with the conditions of the shared ownership scheme.
Where a share of the property is purchased, the £450,000 price cap applies to the full sale price of the property, rather than the price of the share you are buying. There are two ways to calculate the full sale price: the simplest is a multiple of your share (e.g. if you are buying 50% of the property for £200,000, the full sale value would be £400,000) but alternatively, you can take the price of the share and add the net present value of rental payments due over the term of the lease.
If you are purchasing a share of a leasehold property (typically a flat), the value for the purpose of the price cap is the amount to be paid under the contract (excluding any fixtures and fittings), divided by the fraction representing the share of the property to be acquired on completion by the purchaser. For example, if you paid £25,000 for a 25% share, the value is calculated as £25,000 divided by a quarter which is £100,000.
‘Legal interest in land’
Your first time purchase must be of a ‘legal interest in land’. Almost all regular property purchases will satisfy this condition but there is the odd exception: for example, a houseboat wouldn’t meet the LISA rules. The purchase of land on which you intend to self-build your own property is likely to satisfy the LISA rules.
Once you have completed your purchase using your LISA savings and bonus, you must occupy the property as your only or main residence. If you’ve purchased a property that isn’t yet ready (for example, because construction has not yet been finished or it needs renovating to make it habitable), you must intend to occupy the property once construction is complete.
You can’t use LISA funds to purchase a buy-to-let property. If you were to withdraw your LISA funds and attempt to purchase such an investment property, you would incur the 25% withdrawal charge which applies where funds are not used for either a first time purchase or as a pension.
There is an exception to the above rule: if you’re a UK Crown employee serving overseas (or the spouse or civil partner of the same) and you can’t immediately occupy the property on completion, you’ll still meet the terms of the LISA if your intention is to occupy the property as your only or main residence, as soon as practicable. In the meantime, the purchase can take place as a ‘buy to let’ until you return to the UK and take up occupation.
You can withdraw any amount from your LISA for your first purchase – there’s no minimum, and no limit to the number of withdrawals you make provided that the relevant LISA conditions are met for each withdrawal. So, for example, you may:
- Hold more than one LISA (with the same provider, or different providers)
- Make one withdrawal to help you pay your deposit and another to help you complete your purchase (where both withdrawals are directly contributing to the purchase price)
For each withdrawal, the LISA withdrawal process must be followed.
Help to Buy ISAs
In addition to your LISA, you may have also opened a Help to Buy ISA which offers similar benefits. Whilst some have chosen to transfer their funds from their Help to Buy ISA to their LISA, there’s nothing to say you have to do this. Whilst you can save using either account, you can only use the Government bonus from one to purchase your first property. In other words, if you claim the Government bonus for your Help to Buy ISA, you can’t also withdraw money from your LISA for your first purchase (without incurring the 25% withdrawal penalty). A solution is to transfer funds from your Help to Buy ISA to your LISA, allowing you to claim the maximum possible bonus available for your pooled funds.
You can transfer your Help to Buy ISA into a LISA until the end of the LISA’s first year (i.e. 5th April 2018). All money that you contributed to your Help to Buy ISA before LISAs were launched on 6th April 2017 can be transferred to the LISA, without affecting your LISA allowance. This means you can get both the maximum £1,000 LISA bonus (on savings in your LISA of £4,000), plus a bonus on your Help to Buy ISA funds (which you deposited up until 6th April 2017) on top.