LISA rules change

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/82088366#Comment_82088366

As mentioned earlier, I'd be challenging them on the verifiable source of this 'best practice' if what they're saying directly contradicts what's stated in the unchanged legislation.

While the solicitor appears to have contravened the published rules, is there any lawful way of reallocating the funds involved in the transactions, i.e. how did you intend to pay their fees?

masonic

https://forums.moneysavingexpert.com/discussion/comment/82088366#Comment_82088366

How is it that there is a surplus in the first place? Did you haggle the price down after the withdrawal was made?

I remain unconvinced that there is any surplus, and the most likely explanation is that somebody doesn't understand the fungible nature of money.

Unless you paid less for the property than you withdrew from the LISA, then it can be said that all of the LISA funds were used towards the property transaction. Otherwise the penalty should be charged on the full sum withdrawn from the LISA as the transaction wouldn't have met the scheme rules.

User_04535

https://forums.moneysavingexpert.com/discussion/comment/82088563#Comment_82088563

The lisa and the mortgage totalled more than the property value due to mid year interest and gov bonus being added after mortgage broker did mortgage value/agreement. There was also a deposit paid to developer (new build) which came off the value due to be paid for the house, which again came off after mortgage and lisa amounts confirmed. Mortgage terms state has to be used on property purchase, and solicitor confirmed the surplas came specifically from the lisa which instead of returning to lisa provider they applied towards fees. (Can see their wording in my previous reply)

masonic

https://forums.moneysavingexpert.com/discussion/comment/82088696#Comment_82088696

The solicitor cannot confirm the surplus came specifically from the LISA. That would be like a chef confirming they had removed the eggs from a baked cake.

Maybe an example would be helpful. Solicitors have a client money account where they receive funds and allocate them to a specific piece of work or case. Let's say you were purchasing a property valued at £300,000, paid a fee at exchange of £30,000 (which the LISA is allowed to be used towards), and had a mortgage of £250,000 and withdrew a LISA balance of £52,000.

It is best practice to obtain the LISA funds ahead of exchange and only withdraw the specific amount required for the purchase, otherwise excess funds would need to be returned. But let's say the solicitor applied for £52,000 on 1st May and you duly exchanged on 20th May. That £30k can specifically have come from the LISA because you have not yet received your mortgage funds.

You now have £22k of LISA funds in the solicitor's client account assigned to your case. Next, the mortgage funds are advanced to your solicitor ahead of completion on 12th June. Now you have a total of £272k of money in the solicitor's client account assigned to your case, but it is all mixed together, just like if you received two payments into your bank account. Each penny is equivalent and you cannot say specifically which of the two inward transactions it is from.

Now the solicitor sends you a completion statement outlining the total cost of completion including their fees (fees total £2k, taking the completion total to £272k). By chance, the money they are already holding covers this amount exactly, with no overall excess, so they transfer £270k to the seller's solicitor and move the other £2k to their fees and disbursements account. They cannot separate the LISA funds from the mortgage funds and control which is used for which transaction. They are mixed together, like eggs in a baked cake.

If a LISA wasn't involved, then you'd have still paid that 10% deposit at exchange, but it would have come from your own funds. The seller would have had that money before the mortgage funds arrived. The solicitor would have used all of the mortgage funds towards completion, including their fees. The mortgage provider wouldn't have had a problem with it, and all funds have been used on the property purchase.

Insert the LISA, and according to good accounting principles each pound paid towards the solicitor fees at completion would have come from both the mortgage and LISA funds in proportion to the amount still held in the client account at the time (e.g. a 22:250 ratio), but in practice HMRC is not going to care that there were other funds in the account at the time providing monies in excess of the LISA sum were sent to the seller's solicitor overall in the transaction.

Ultimately, HMRC will see that £52k went into the account ahead of the purchase transactions of £30+270k and be happy, and the mortgage lender will see that £250k was lent against a purchase price of £300k, giving the expected 83.3% LTV, and be happy (if you borrowed £250k and then only £298k ended up going to the seller they would have a problem).

I think the solicitor and Legal Ombudsman have just explained this really badly. There is no issue with what has actually been done as far as I can see. If something was done wrongly, then you'd be covered by your solicitor's professional liability insurance.

In the scenario there was a surplus in the account after completion, best practice is to avoid that by getting a smaller mortgage, not return money to the LISA, but it doesn't seem like that has happened.

User_04535

https://forums.moneysavingexpert.com/discussion/comment/82088850#Comment_82088850

Thats great for a basic understanding but is not how financing works. Money can be ringfenced and allocated to specific purposes without all getting mixed in a pot, and the way you describe it is using lisa money towards fees which they specifically state in both lisa rules and some mortgage terms that you can't do.

The solicitor did kindly confirm the full mortgage monies went onto the purchase price as per their terms, and that it was specifically lisa funds which then had the surplas for use on fees.

This was not meant to be a discussion on what is right / wrong but rather can you use lisa savings towards solicitor fees as this is what the solicitor and ombudsman have told me you can. If this is now an accepted practice then surely other first time buyers may consider the same as it comes with the 25% gov. bonus to pay for the fees.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82089526#Comment_82089526

The reason the solicitor and the Legal Ombudsman are in agreement is due to the way HMRC regulates LISAs and how client accounting actually operates. When a solicitor requests your LISA funds, they sign a legally binding HMRC Conveyancer Declaration. To satisfy HMRC that the withdrawal is penalty-free, they must declare that "I will only use the Lifetime ISA funds released towards the purchase price of my client’s first Residential property, or my client’s first share in a Residential property".

There is no question that your solicitor has made that declaration, and it would be an offence for them to make it and then fail to abide by it. Clearly both the solicitor and the Legal Ombudsman know that. So how can this be?

In the eyes of HMRC and the law, a solicitor "uses" the LISA funds towards the purchase price by ensuring that the value of the property purchase completely absorbs the entire value of the LISA withdrawal. HMRC’s financial test is simple maths: Did the total amount of money sent to the seller after the LISA withdrawal exceed the total amount withdrawn from the LISA? Yes.

If the property had only cost £50,000, and the solicitor withdrew £52,000 from the LISA, then they would be violating the declaration, because £2,000 of LISA value literally could not fit into the purchase price. In your case, 100% of the LISA value fit inside the purchase price (leaving plenty of room for the required mortgage part-funding).

You mentioned that the solicitor confirmed the "full mortgage monies went onto the purchase price" and that the LISA funds generated the surplus. This just describes a software ledger allocation, not physical cash separation. A solicitor's client account is one big pool of money. When the mortgage funds arrive, the solicitor’s software must assign them explicitly to the "purchase price" row because mortgage lenders have strict rules stating their loan must be fully secured against the property value.

Because the mortgage must be allocated first on the spreadsheet to satisfy the lender, the remaining float naturally sits against the other funding source on the ledger - your LISA. But once money enters a single bank account, the individual digital pounds lose their identity. They are completely fungible.

The solicitor did not hand the seller a pile of mortgage cash and then use a pile of LISA cash to pay their firm's invoice. They paid the seller £300,000 out of a mixed pot, fulfilling both the lender's requirements and the LISA declaration, leaving general cash that was consumed by the fees already invoiced by that time.

You asked if this is an accepted practice that other first-time buyers should consider doing to use the 25% government bonus on their solicitor fees. In reality, this isn't a deliberate strategy that can or should be engineered, and attempting it on purpose is a massive risk.

What happened in your specific case was a perfect storm of timing: a final government bonus payment was credited to your account just before closing, alongside closing interest, making your final LISA balance larger than originally anticipated. Because the instruction was presumably to withdraw the full balance and close, an unexpected surplus landed in the solicitor's account.

You were incredibly fortunate that your outstanding fees completely absorbed this extra cash. If your fees hadn't absorbed it, the solicitor would have been left holding a true cash surplus. To fix it, they would have had to frantically scramble to reduce your mortgage advance from the lender at the eleventh hour, or return the excess to the LISA manager - locking it back up in the LISA until you are 60, or potentially delaying completion. Solicitors may refuse to request a LISA withdrawal without a precise figure to avoid this exact administrative headache.

So, to answer your core question: No, first-time buyers cannot deliberately use this as a loophole to get a bonus on their fees - they would effectively be borrowing money they didn't need, not getting more bonus than they already had. Your situation was simply a case of accidental over-funding where standard legal accounting safely absorbed the difference. The solicitor and the Legal Ombudsman aren't playing fast and loose, they simply used what they referred to as "best practice" to save you from a massive bureaucratic nightmare. But ultimately you borrowed slightly more than you needed, which is probably a financially worse outcome if you have the money to pay the fees separately and get a smaller mortgage.