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Newsletter issue - August 2020.
Lifetime ISAs (LISAs) continue to provide a tax-efficient savings vehicle for investors as there will be no income tax to pay on interest earned and no capital gains tax to pay on subsequent profits arising on the money invested. Up to £4,000 a year can be invested in a LISA, with the government providing a 25% bonus on contributions at the end of each tax year up to the age of 50.
LISAs can generally held by an individual who:
- is 18 years old or more;
- is under 50 years old (individuals between 18 and 40 may open accounts, but investments may be made up to age 50);
- has not made and will not make any payments into any other Lifetime ISA in the same tax year;
- has not exceeded the overall subscription limit (see below);
- has not exceeded the overall Lifetime payment limit of £4,000; and
- is UK-resident or has earnings from overseas Crown employment (or is married to or in a civil partnership with a person who has such earnings).
The funds in the account, including the government bonus, may be used to buy a first home worth up to £450,000 at any time from 12 months of opening the account and can be withdrawn from age 60 for any other purpose. Savers are also able to access the funds in their account if they become terminally ill.
Unauthorised withdrawals
Under the normal rules, most withdrawals that are made from accounts will be subject to a 25% charge of the amount withdrawn, which is deducted by the plan manager and paid to HMRC. However, to help with the impact of the coronavirus (COVID-19) pandemic, in May 2020, the government announced that the charge for unauthorised withdrawals from a LISA during the period 6 March 2020 to 5 April 2021 inclusive would be reduced from 25% to 20%.
What happens if the investor dies?
On the death of an account holder, the Lifetime ISA funds will form part of the estate, but a spouse or civil partner may inherit the ISA tax advantages and will be able to transfer the funds into his or her own ISA in addition to their own allowance (the 'additional permitted subscription').
When an investor dies, no further payments can be accepted into the account. However, since 6 April 2018, the LISA can remain open as a continuing account of a deceased investor.
The government bonus can be accrued on payments made into the LISA on or before the date the investor died and claimed accordingly. The investor's estate can only receive the government bonus once the Lifetime ISA has been closed.
Any government bonuses claimed on payments made after the date of death of the investor must be withdrawn and repaid, although there will be no withdrawal charge payable if the person managing the account was unaware that the investor had died.
What happens if an investor becomes terminally ill?
When a Lifetime ISA investor is terminally ill and has obtained written evidence from a UK registered medical practitioner that they have less than 12 months left to live, any subsequent withdrawals will be charge-free. A withdrawal in these circumstances does not require a closure of the account. Subject to the wishes of the investor, the account can remain open and further amounts can be paid in.
Evidence from a UK registered medical practitioner proving that an investor has a terminal illness applies to the whole period in which the LISA remains open, even if this is longer than the 12 month period set out in the written evidence provided by the investor.
