Lifetime Isa savers hit with £11,000 fines from taxman – here’s why

Some would-be first-time buyers are being hit with fines of up to £11,000 for Lifetime Isa withdrawals, data shows.

Around 74,000 savers received Lifetime Isa sanctions between 2022 and 2023, a Freedom of Information application from Plum to HMRC shows.

Of these savers, 15,977 were forced to repay £1,000 or more, 6,139 savers were fined more than £2,000, while 851 would-be homebuyers were fined more than £5,000.

The top 25 penalties imposed by HMRC averaged £11,000 each, a significant portion of a first-time buyer’s deposit.

It comes as Lifetime Isa providers are calling on the Chancellor to review the product in the next Budget.

Plum is urging the Chancellor to remove Lifetime Isa penalties and increase the cap on the maximum property value that can be purchased with a Lisa, which currently stands at £450,000, to £600,000.

Moneybox is also calling on the Government to “future-proof the Lifetime Isa”, which would mean the property price cap would be indexed and subject to an annual review.

How does Lifetime Isa work?

Lifetime Isas were launched in 2017 to help people get their foot on the housing ladder or help them save for the future.

Savers under 40 can open a lifetime Isa and until they reach 50, the Government will match £1 for every £4 they save, giving them a £1,000 bonus on top of the £4,000-a-year maximum. they can save.

That money can be used for a deposit on a first home or withdrawn from age 60 to help fund retirement.

What are the sanctions?

If you withdraw money from a Lisa for any reason other than purchasing your first property before age 60, the Government imposes a 25 per cent withdrawal charge.

Any withdrawals within 12 months of your first payment will also incur a 25 per cent government withdrawal charge.

The only other reason you can withdraw funds is if you are terminally ill.

The Government imposes a 25 percent penalty on the total value of the savings fund at the time of its closure for withdrawals outside of these, eliminating not only the 25 percent government bonus but also a portion of the interest or growth of the investment.

While there are multiple reasons why savers may be penalized, the current £450,000 limit has attracted the most widespread criticism from Lifetime Isa providers and first-time buyers.

Plum’s Rajan Lakhani said: “There are currently dozens of local authorities across the country where the median house price is above the £450,000 limit, and that figure will only rise in the future.”

Buyers in London, where average property prices are £536,052, are hardest hit by the Lifetime Isa limit.

There are currently 28 local authorities outside London with averages above the £450,000 ceiling. These include Essex (£467,357), Kent (£500,569) and Hertfordshire (£584,360), according to the latest Land Registry data.

Lakhani said: ‘The Chancellor has put home ownership at the center of Labour’s program for government. That’s why it makes sense to index the maximum Lifetime Isa limit from the moment it was launched and set a new limit closer to £600,000.’