Buying a new-build with a Lifetime ISA: the rules, risks and how to avoid penalties
A Lifetime ISA (LISA) can help first-time buyers save for a home deposit by topping up savings with a 25 per cent Government bonus on contributions of up to £4,000 a year.
It can also be used as a retirement savings vehicle.
While the government consults on proposals to introduce a new “First Time Buyer ISA”, the LISA remains available to those eligible and is a popular route onto the housing ladder.
The government bonus is added as savings are made (subject to the limits of each tax year) at the appropriate point in the conveyancing journey. Funds held in the account are withdrawn by the conveyancer and used towards the price of the house.
Unlike the Help to Buy ISA scheme, LISA funds can be used by first-time buyers at both exchange of contracts and completion.
However, for those buying a new build and planning to use a LISA there are some additional considerations. In particular, how the unique timescales of the transaction interacts with the scheme rules.
When buying a second-hand property, exchange and completion often take place within a matter of weeks, allowing funds to be drawn and the purchase concluded within a predictable timeframe.
A typical new build purchase follows a different timetable. Buyers frequently exchange contracts within 28 days of reserving the new home, even though it may not be ready to move into for many months. It may still be in early stages of construction when contracts are exchanged.
This creates an important consideration for anyone planning to use a LISA. Under current rules, once LISA funds are withdrawn for a property purchase, completion is expected to take place within 90 days. Although a further 90-day extension can be applied for, this is not guaranteed to be approved.
If funds are withdrawn for use at exchange on a new build purchase, and the development is subsequently delayed, there is a risk that the transaction won’t complete within the required timescale.
In those circumstances, the LISA scheme requires the return of the funds, or the buyer could face a 25 per cent financial penalty on the total amount withdrawn.
Because deposits paid at exchange are ringfenced, and standard property contracts (including those for new homes) don’t contain provision for money to be returned, this could prove costly.
For this reason, our advice to new build purchasers who are intending to use LISAs is to use the funds for completion rather than exchange. This may mean either a reduced or nil deposit at exchange, and the housebuilder needs to agree to this.
This approach reduces the risk associated with construction delays and allows buyers to continue saving into the account while the property is being built. Where the purchase crosses into a new tax year, they can potentially benefit from additional government bonuses.
Remember though that the LISA funds cannot be used for anything other than the purchase price.
Unless you’re also saving for retirement, make sure that you do not have more in the LISA than you need, considering your reservation fee and any housebuilder contribution.
Every transaction is different and buyers should always seek legal advice based on their individual circumstances.
Understanding how a LISA interacts with the unique timetable of a new-build purchase can help avoid unnecessary complications later in the process.
Richard Wisnia is head of new-build conveyancing at Switalskis