MSE News: Martin urges Government to change unjust Lifetime ISA rules penalising first-time buyers

MSE_Petar

First-time buyers paid the Government an estimated £1.8 million in fines for taking money out of their Lifetime ISAs (LISAs), new figures for the 2023/24 tax year show. MoneySavingExpert.com founder Martin Lewis is renewing calls to the Government to stop those who are using LISA savings for their intended purpose – buying a first-time property – having to pay these unjust penalties.

Read the full story:
' Martin Lewis urges Government to change unjust Lifetime ISA rules that cost first-time buyers £1.8 million last year'

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Qyburn

Is it actually a "fine" or are they just not benefiting from the government handout by buying a property that doesn't comply?

masonic

Qyburn said:

Is it actually a "fine" or are they just not benefiting from the government handout by buying a property that doesn't comply?

The penalty means they get back less than they paid in. Reducing the penalty to 20% would result in a non-punitive clawback of the bonus paid.

mathmog

This penalty is so silly I cannot help wondering if it arose because of some innumerate civil servant with a classics degree thinking that if you added 25% and then took away 25% you’d get back what you put in. I would not put it past them to be standing firm to avoid revealing such a foul-up. But another dimension to this is how it applies to part buy part rent properties. If you bought a 35% share of a property for 160,000 you’d still suffer the penalty because that is 35% of 457k which is over the limit. FINE!!!!

Kim_13

mathmog said:

This penalty is so silly I cannot help wondering if it arose because of some innumerate civil servant with a classics degree thinking that if you added 25% and then took away 25% you’d get back what you put in. I would not put it past them to be standing firm to avoid revealing such a foul-up. But another dimension to this is how it applies to part buy part rent properties. If you bought a 35% share of a property for 160,000 you’d still suffer the penalty because that is 35% of 457k which is over the limit. FINE!!!!

If it was, they know by now that it is a 6.25% penalty, since they reduced the penalty to 20% during COVID, so that people could get back what they put in in order to meet essential expenses at that time when they may have had very little or nothing coming in. They could have made that a permanent change or changed it to 20% if a first property purchase would have been under £450,000 indexed to 2017, but chose not to do so.

H2B ISA limits not changing are more forgivable since a) you can just take back what you put in and b) they were always a time limited product. Lifetime ISAs have no end date so the cap gets more and more out of date.

Also, if people can afford to proceed with their now over the limit purchase without the LISA funds thereby avoiding the penalty, they have to leave it there until they are 60. Given this, I think LISA savings should be treated in a similar manner to pension pots and disregarded for the purposes of any means tested benefit claims they may need to make in the future.

Furey

Qyburn said:

Is it actually a "fine" or are they just not benefiting from the government handout by buying a property that doesn't comply?

Of course it is! They take the 'handout' AND they take 6.25% of my own money. When I joined the scheme in 2017 I didn't expect that an ex council house with a bad roof was going to cost over £450k where I live. I didn't expect them to retain the same limit either. And I didn't know that a pandemic would cause me to lose my job and knock back my house buying aspirations by several years. It's a ridiculous and unnecessary punishment for people who are already pressed, and were trying to do the right thing.

Baldeagle095

£450k seems awfully expensive for a first time buyer. 
Perhaps the real problem was the artificially low mortgage interest rates?
Maybe house prices should be more realistic?

Rich2808

People knew the rules of the lifetime isa. 

Should people also be allowed to withdraw from their pensions penalty free too before 57 - which they got tax relief on? Not sure if I see the difference - given the 25% taxpayer funded lifetime isa bonus is in effect a proxy for tax relief.

The whole concept of the lifetime isa was wrong anyway - just another bung for the housing market bankrolled by other taxpayers. You can have your cash in full - but only if you buy a house. Nonsense policy - and ageist too - life doesn't end at 40?

fistfulofsteel

If this change comes in, when is it likely to happen? I'm a first time buyer looking to buy my partner's ex's share of their flat (well under limit), but as neither of us can work getting a mortgage is likely to be impossible, so I guess I'll have to pay the penalty (many thousands of pounds) to use the money in the LISA. I also don't want to keep the LISA as it makes us ineligible for universal credit. Currently unsure whether to pay the penalty and get all this sorted out or wait in the hope of a change in the rules.

WillPS

fistfulofsteel said:

If this change comes in, when is it likely to happen? I'm a first time buyer looking to buy my partner's ex's share of their flat (well under limit), but as neither of us can work getting a mortgage is likely to be impossible, so I guess I'll have to pay the penalty (many thousands of pounds) to use the money in the LISA. I also don't want to keep the LISA as it makes us ineligible for universal credit. Currently unsure whether to pay the penalty and get all this sorted out or wait in the hope of a change in the rules.

Unknown. 

If the Chancellor announces changes they might be effective from the next tax year, the tax year after that... and of course whether those changes allow people like yourselves who unfortunately won't be able to use the money as they had intended to get their money back... all this stuff is unknown until it's leaked or announced.

The strongest likelihood is status quo, in my opinion, not that it helps anyone much.

Kim_13

Rich2808 said:

People knew the rules of the lifetime isa. 

Should people also be allowed to withdraw from their pensions penalty free too before 57 - which they got tax relief on? Not sure if I see the difference - given the 25% taxpayer funded lifetime isa bonus is in effect a proxy for tax relief.

The whole concept of the lifetime isa was wrong anyway - just another bung for the housing market bankrolled by other taxpayers. You can have your cash in full - but only if you buy a house. Nonsense policy - and ageist too - life doesn't end at 40?

No, they shouldn’t be allowed their pensions early (but I think there is a case for it being 55 where that was the age they agreed to when they put the money in, just as those who opened the Lifetime ISA agreed to 60 if using for retirement.) 

The problem with the Lifetime ISA is that the contents of it aren’t disregarded as capital as a pension is - if something is inaccessible, then you expect it to be disregarded. In Furey’s case, he/she/they lost their job through no fault of their own, meaning house savings going on essential living expenses because they are not ringfenced like pension ones (thus no entitlement to any support) and a delay in being able to get a mortgage (as a period of time in a permanent job will be required.) Parents couldn’t decide to loan money to keep a purchase on track, as the LISA can’t be accessed penalty free without a mortgage. Those things increased the chances of their purchase ending up above the frozen limit.

I have always opposed the age limit - plenty of over 40s don’t own property, but could open the Help To Buy ISA. Those people are now either ineligible or still hold the H2B and are struggling with a lower limit (£250k unless London.) The only good thing is they can get their money back and buy an over limit property without losing 6.25% of it. 

Not getting a taxpayer funded bonus is one thing but losing part of your own savings is wrong, especially when the reason for that is the limit not rising with property prices (which is effectively equivalent to fiscal dragging people into the penalty.) The LISA was overgenerous to those outside London perhaps, as it could buy more than a starter home which was the point of the policy - while those in London might now be left to choose between a penalty or a 1 bed flat (not a good thing unless you have no desire to start a family as you lose the FTB Stamp Duty rates and have to go through moving costs/surveys/legal fees again in a short time.)