What are lifetime ISAs?
Lifetime ISAs (individual savings account) can be used to buy your first home or for savings later in life, such as retirement. To open a lifetime ISA account, you must be aged 18 or over, and under 40. You can put up to £4000 per year into the lifetime ISA, which can be as cash savings or as stocks and shares.
What makes lifetime ISAs attractive is that the government will add a 25 per cent bonus to your savings, up to a maximum of £1000 per year. This means that if you save the full £4000 in a year, you will have a total of £5000 with the bonus included – and this amount is without the interest or growth that you may make. However, once you reach age 50, you cannot pay into your lifetime ISA or receive the 25 per cent bonus.
You can withdraw savings from your lifetime ISA if you are buying your first home, aged 60 or over, or are terminally ill with less than a year to live. If you want to withdraw money outside of this, you will have to pay a 25 per cent withdrawal charge.
Lifetime ISAs for first time buyers
For first time buyers (those who have never owned a property anywhere in the world), the lifetime ISA money must be used to buy a property that costs £450,000 or less, you must buy the property at least 12 months after you open the lifetime ISA account, you must use a conveyancer or solicitor to act on your behalf in the purchase, and you must be buying the property with a mortgage.
When it comes to withdrawing the money from your lifetime ISA to buy a first home, you will need to complete an investor declaration document, which will outline to your conveyancer or solicitor: the amount you want to withdraw; details of your lifetime ISA account; details of the property you wish to purchase; and that all the conditions for a charge-free withdrawal are met. Your conveyancer or solicitor will also need to complete a conveyancer declaration document, which will be sent to the lifetime ISA manager, and outline; that they are an eligible conveyancer; they have received the information from you as the investor and they believe the information to be true; the purchase price of the property; and details of the account that will receive the funds withdrawn.
The ISA manager should pay the funds requested to you within 30 days of receiving the declaration. You will then need to tell the ISA manager the date of completion of the purchase within 10 business days of the completion taking place. It is important to note that the lifetime ISA regulations state that the purchase must be finalised within 90 days of you receiving the withdrawal funds. If the purchase of the property has not been completed within the 90 days, you will need to inform the ISA manager within 10 days of the 90 days elapsing. The amount withdrawn will then need to be sent back to the ISA manager.
Purchasing a new build home with a lifetime ISA
If you do not expect the purchase of the property to be completed within 90 days of withdrawing your funds from your lifetime ISA, you can ask the ISA manager for a 60-day extension. This can be prolonged to another 30 days if required. However, these extensions are not guaranteed. This can cause significant issues for first time buyers of new build homes, where unexpected changes can occur during the building process.
Adrian Morley, partner in the property department of Hutchinson Thomas, comments:
“Lifetime ISAs can be very beneficial to first time buyers as they qualify for the government bonus scheme. However, there are a number of issues for first time buyers of new build homes when it comes to using their lifetime ISA funds for the purchase.
“Many first time buyers don’t realise that it can take up to 30 days for funds to be received following a request for withdrawal of funds for a deposit. The 90-day period for the completion of the sale to take place following the withdrawal of funds can also pose problems. Although the 90-day period is often sufficient time for completion, if the purchaser is buying a new build property with a long period between exchange and completion, there is the risk that the funds will need to be returned to the ISA manager or the buyer is faced with a 25 per cent penalty, which could well be the amount of the bonus itself.
“First time buyers of new builds could mitigate these unfavourable circumstances by negotiating with the developer. The developer may agree to an exchange with a lower deposit, but this does leave them without much security if the sale falls through.
“Clearly, many problems can arise when it comes to using a lifetime ISA to fund the purchase of a property, particularly new builds, for first time buyers. It is always best to seek the advice of a qualified conveyancer or solicitor when looking to buy a first property to minimise the issues that can arise during what can be a stressful but exciting life event.”
For more information on property matters, contact Adrian Morley on 01639 640521 or email email@example.com