Lifetime ISA: when a withdrawal costs 25%, and when it is charge-free – HMRC guidance

HM Revenue & Customs (HMRC) has published guidance on GOV.UK for Lifetime ISA managers. It explains when a withdrawal charge must be calculated, how much it is and what happens if an investor appeals. The document is aimed at managers, but it also shows the rules that affect savers.

When funds can be withdrawn

Lifetime ISA funds can be withdrawn at any time, in line with the account terms set by the manager. The manager is responsible for calculating and deducting the correct charge. A withdrawal should be paid within 30 days of the instruction. This deadline does not apply to withdrawals for a first-time residential purchase.

Charge-free withdrawals

No charge applies in situations including:

• a first-time residential purchase,
• the account holder reaching the age of 60 (later interest and growth remain tax free),
• the death or terminal illness of the account holder,
• payments removed from an invalid account,
• management fees paid to the manager under its terms and conditions,
• the manager being declared in default by the FCA or the FSCS,
• events not caused by the account holder,
• repayment of an incorrect government bonus to HMRC.

How much the charge is

Any amount withdrawn from a Lifetime ISA that is not the result of such an event is subject to a 25% charge. The manager deducts it from the money paid out.

In limited cases the charge cannot be applied before the withdrawal. The guidance gives this example: money was withdrawn to buy a home, the purchase failed and the funds were not returned to the account. The charge is then applied retrospectively. For a £4,000 withdrawal, the charge is £1,333.33, which is 25% of £5,333.33. That leaves a net withdrawal of £4,000.

Reporting to HMRC

The manager reports the withdrawal and the charge due to HMRC on the same monthly claim. A claim period runs from the sixth day of a month to the fifth day of the next. The charge must reach HMRC no later than 28 days after the end of the period in which the withdrawal was made. When a charge is due, the account holder and the manager are jointly and severally liable for paying it.

Appealing a charge

An account holder can ask the manager in writing for a statement showing the gross withdrawal, the charge deducted and the net amount paid. The manager must provide it within 30 days of the day after receiving the request.

If an account holder thinks a charge was wrongly made, they can apply to HMRC for a refund within 4 years. Examples include after a terminal illness is notified, a transfer between Lifetime ISAs, or funds not being returned to the account after a failed first-time purchase. The manager does not have to support the application, and HMRC tells the account holder its decision directly. The manager cannot reverse a wrongly applied charge without an instruction from HMRC.

What this means for you

People who hold a Lifetime ISA should know that a withdrawal outside the listed situations, for example for something other than a first home, means a 25% charge. If they believe a charge was applied wrongly, they have 4 years to apply to HMRC for a refund. The guidance sets out no separate rules for foreign nationals.