Lifetime ISA: New Connected Party Mortgage Restriction Now Active

• As of April 6, 2024, Lifetime ISA funds cannot be used for a first residential property purchase if financed by a legal mortgage from a connected party.
• A 20% withdrawal charge will apply if a connected party legal mortgage is used, or if the property value exceeds £450,000.
• The definition of a 'connected person' is outlined in section 993 of the Income Tax Act 2007.
• The purchased property must include a 'legal interest in land' and be intended as the investor's sole or main residence.
• Withdrawal charges also apply if the property is used for letting or as a holiday home, or if it's not a 'legal interest in land' like a houseboat.

Should a first-time buyer proceed with a property purchase using a legal mortgage funded by a connected person, a substantial 20% withdrawal charge will be applied to the funds taken from their Lifetime ISA.

Significant changes to Lifetime ISA (LISA) rules, effective from April 6, 2024, introduce a critical new restriction for first-time residential property purchases. Under the updated regulations, it is now explicitly prohibited for a property acquisition to be financed by a legal mortgage where the parties involved are considered 'connected.' This new Lifetime ISA connected party mortgage restriction is designed to prevent certain types of transactions that could be perceived as circumventing the spirit of the LISA scheme.

Should a first-time buyer proceed with a property purchase using a legal mortgage funded by a connected person, a substantial 20% withdrawal charge will be applied to the funds taken from their Lifetime ISA. This penalty underscores the importance for investors and their advisors to fully understand these updated Lifetime ISA withdrawal connected person rules before committing to a property transaction. The changes aim to ensure that LISA funds are used for genuine, arm's-length property acquisitions by eligible first-time buyers.

The definition of a 'connected person' for the purpose of these new rules is established by section 993 of the Income Tax Act 2007. This legal framework provides clarity on who falls under this category, making it essential for individuals to verify their relationships to avoid unintended penalties. Beyond this new restriction, the fundamental conditions for making charge-free withdrawals from a LISA for a first residential property purchase remain in place.

To qualify for a charge-free withdrawal, the funds must be applied towards the purchase price of the investor's first residential property located within the UK. Crucially, the property must include a 'legal interest in land.' Purchases that do not meet this criterion, such as houseboats or land acquired with the intention of building a residential property on land already owned by the investor, will incur the standard 20% withdrawal charge. Furthermore, it is a strict requirement that the investor intends to occupy the property as their only or main residence upon completion of the purchase.

In addition to the connected party mortgage restriction, a 20% withdrawal charge is also levied if the property's purchase price exceeds the Lifetime ISA property value limit of £450,000. This financial cap is a key consideration for first-time buyers utilizing their LISA savings. Other scenarios can also trigger the 20% withdrawal charge, including using the property for letting purposes or as a holiday home, as the LISA is specifically designed for owner-occupation.

Specific rules apply to certain property types and investor circumstances. For instance, if purchasing a partially completed dwelling that is not yet habitable, the investor must still demonstrate a clear intention to occupy it as their main residence once construction is finished. An exception to the main residence rule exists for UK Crown employees serving overseas, or their spouses/civil partners also serving overseas; they are permitted to temporarily let their property until they return to the UK and can occupy it. The 'purchase price' itself is defined as the amount paid under the sale and purchase agreement for the legal interest in land, with specific considerations for Regulated Home Purchase Plans (excluding fixtures) and joint acquisitions where one party previously owned the land (market value of the whole land). For a leasehold interest under a Shared Ownership Arrangement, the purchase price is the amount paid.

Lawyers advising first-time buyers using Lifetime ISAs must be aware of the new restriction, effective April 6, 2024, prohibiting the funding of property purchases via legal mortgages from connected parties, as this will incur a 20% withdrawal charge. They should also counsel clients on the £450,000 property value cap for charge-free withdrawals and the requirement for the property to be the investor's main residence, ensuring compliance to avoid unexpected penalties.

Source: Original reporting based on GOV.UK guidance updates