Lifetime ISA Explained
A Lifetime ISA helps your investments grow tax free and with no tax liability on income and gains, it is certainly an option to consider when looking to buy your first home.
This insight attempts to answer the following questions: -
What is Lifetime ISA?
What are the benefits of Lifetime ISA?
Who can open Lifetime ISA?
Can I have a joint Lifetime ISA?
What is the difference between Help to Buy ISA and Lifetime ISA?
How does Lifetime ISA save tax?
A Lifetime ISA (or LISA) is a wrapper that helps you save and invest in a tax efficient way. The government pays 25% (up to a maximum of £1,000 per tax year) of your contribution into your into your Lifetime ISA. This means the maximum you can pay into your Lifetime ISA is £4,000 per tax year. This amount is typically received in few weeks and is available to be invested right after. You do not need to return this money back to the government and is tax free (except if you withdraw outside permitted rules).
£4,000
+
£1,000
=
£5,000
The major advantage of a Lifetime ISA is that you can invest the entire amount (your contribution + government bonus) and all income received and capital gains are tax free (as per current tax rules). If you are looking to purchase your first home, then a Lifetime ISA can be a good option. Your first payment into your Lifetime ISA must be made before you turn 40. You can only withdraw from your Lifetime ISA without any penalties if you are: -
- Buying your first home
- Aged 60 or over
- Terminally ill (less than 12 months to live)
Lifetime ISA withdrawal charge
A withdrawal charge is imposed on withdrawals made outside the permitted rules. This is calculated at 25% of the withdrawal amount and you may get back less than what you initially paid.
£4,000
+
£1,000
=
£5,000
£5,000
-
£1,250
=
£3,750
Who can open a Lifetime ISA?
You need to be over 18 but under 40 years of age to open a Lifetime ISA and your first payment into your Lifetime ISA must be made before the age of 40.
Can I have a joint Lifetime ISA?
No, as the name implies; Individual Savings Account is only per individual. It cannot be held in joint names.
What is the difference between Help to Buy ISA and Lifetime ISA?
| Help to Buy ISA | Lifetime ISA |
|---|---|
| Availability | |
| No longer available for new investors | Must be 18 or over but under 40 to open a Lifetime ISA. |
| Annual Allowance | |
| £2,400 | £4,000 |
| Maximum possible bonus | |
| £3,000 | £33,000 |
How does Lifetime ISA save tax?
Tax treatment is the same as the Stocks and Shares ISA. In both, there is neither income tax, nor dividend or capital gains tax liability arises because all income and gains made within a Lifetime ISA are tax free. Find out more on Stocks and Shares ISA.
Transferring from Lifetime ISA to another ISA
At age 20, you start paying £4,000 into your Lifetime ISA every tax year and invest the total (your contribution + government bonus). After 5 years, you decide to transfer your Lifetime ISA into a Stocks and Shares ISA. Assuming an investment return of 5% per year, you would have accumulated a sum of £27,628.16 but only £20,721.18 will be transferred to your Stocks and Shares ISA as the transfer is treated outside the permitted withdrawals and is subject to 25% withdrawal charge.
Lifetime ISA withdrawal for house purchase
At age 28, you start paying £4,000 into your Lifetime ISA every tax year and invest the total (your contribution + government bonus). After 20 years, you decide to purchase your first home. Assuming an investment return of 5% per year, you would have accumulated a sum of £165,329.97 and withdrawing (fully or partially) is permitted without any withdrawal penalties.
Lifetime ISA withdrawal after you turn 50
At age 35, you start paying £4,000 into your Lifetime ISA every tax year and invest the total (your contribution + government bonus). Assuming monies in your Lifetime ISA were never invested, after 15 years you would have accumulated a sum of £80,000.00. You will incur a withdrawal charge if you withdraw before you turn 60.
Prematurely withdrawing from Lifetime ISA
At age 30, you start paying £4,000 into your Lifetime ISA every tax year and invest the total (your contribution + government bonus). After 10 years, you decide to withdraw from your Lifetime ISA outside the permitted rules. Assuming an investment return of 5% per year, you would have accumulated a sum of £62,889.46 but will only receive £47,167.10 as the total amount is subject to 25% withdrawal charge.
Please note all figures used above are hypothetical and for illustration purposes only and not based on actual returns; the actual return rate may vary. Tax laws could change the way dividends and capital gains are taxed.