Lifetime ISA over-cap buyers pay 20% charge from 29 October

First-time buyers using a Lifetime ISA (LISA) for a home above the £450,000 price cap face a lower withdrawal charge from 29 OctoberLegislation 2026Legislation. A withdrawal that meets every first-time residential purchase condition except the price cap now bears a 20% chargeLegislation rather than the standard 25%Legislation, under the Individual Savings Account (Amendment) (No. 3) Regulations 2026Legislation, which come into force on 29 October 2026Legislation and apply to withdrawals made on or after that dateLegislation.

The structure is a targeted exception, not a general rate cut. The standard 25% charge continues for all other chargeable withdrawalsLegislation; it recoups the government bonus with interest or growth plus part of the saver's subscriptions. The reduced 20% rate applies only where the withdrawal would have qualified as a first-time residential purchase but for the property exceeding £450,000Legislation. For reporting and subscription-limit purposes the withdrawal is otherwise treated as a first-time residential purchase.

Failed purchases above the cap are unwound in full. Where the account manager has deducted the 20% charge, the purchase fails in the circumstances set out in the rules, and the withdrawn funds are returned to the account manager as required, the withdrawal is treated as one to which paragraph 8 of Schedule 1 (charge when unlisted withdrawal made) does not applyLegislation and the account manager must restore an amount equal to the withdrawal charge deducted in respect of the withdrawal to the account investor's Lifetime ISALegislation. The repayment of that charge into the account does not count against annual subscription limits or Lifetime ISA payment limits. Information returns must reflect the reversal, or be corrected without delay where already filed, and the amount payable by the account manager to the Board is reduced by an amount equal to the withdrawal charge deducted where the manager has not paid it, and the Board must repay the manager that amount where it has been paid.

The change sits within the existing Lifetime ISA framework: a 25% government bonus on up to £4,000 saved each year until age 50, usable for a first home up to £450,000 or later-life saving, with charge exceptions already in place for terminal illness and savers aged 60 or over. LISA managers must identify customer purchases at or above £450,000 from the change date, apply the 20% charge, and adapt IT systems and reporting; conveyancers handling affected purchases need to reflect the new treatment. HMRC guidance for ISA managers will be updated, and a Tax Information and Impact Note is to be published.

Legal basis: the Individual Savings Account (Amendment) (No. 3) Regulations 2026 (SI 2026/1130)Legislation, amending the Individual Savings Account Regulations 1998, made under the Savings (Government Contributions) Act 2017, the Taxation of Chargeable Gains Act 1992 and the Income Tax (Trading and Other Income) Act 2005.