Stamp duty holiday: what it means for Lifetime ISA holders

The government has announced a stamp duty holiday for all house purchases, saving prospective homeowners thousands of pounds in tax payments.

While the decision doesn’t directly affect Lifetime ISA (LISA) holders, it does have secondary implications for them. One section of LISA holders in particular stand to benefit.

Here is our guide to the stamp duty holiday and if you may be one of those to benefit from the changes.
 

Stamp duty holiday explained

Chancellor Rishi Sunak announced a ‘holiday’ on paying stamp duty for all properties and buyers of primary residences in England and Northern Ireland that cost £500,000 or less during his summer economic update. The holiday started on 8 July, the day of the announcement, and is currently set to run until 31 March 2021.

Beforehand stamp duty was charged at different rates depending on the value of the property. Between £125,000 and £250,000 the rate was 2%, and above this it was 5%.

This means someone looking to buy a house at the top end of the holiday threshold of £500,000 will save £15,000 in tax. Buy-to-let investors and second-home buyers are also eligible, however the extra 3% levy on those kinds of buyers still applies.
 

Why it matters to LISA holders

When someone takes out a LISA it is usually for one of two purposes. Account holders can use the account to either save for a deposit on a first home purchase, or save it long-term as a retirement fund.

The great benefit of the LISA is the annual bonus of 25%, up to a maximum of £1,000 that the government provides on top of an individual’s savings. No matter how you swing it, this is very generous, with the caveat being you only get the bonus if you use the money for one of the two aforementioned purposes.

The LISA until recently had a 25% penalty for withdrawing for other purposes, but this was relaxed (to 20%) in light of the coronavirus crisis so people who were in need of emergency funds wouldn’t be punished.
 

Benefits to LISA holders

The stamp duty policy change has, on the face of it, a straightforward impact on prospective homeowners, saving considerable tax sums in the homebuying process. But for LISA holders it is perhaps not as clear-cut.

Many LISA holders will have an account for the purposes of saving to buy a first home. The rules are very specific on this from the government, so to use a LISA pot for a house deposit, the holder must be a first-time buyer.

Despite these most recent changes, first-time buyers were already in receipt of a considerable tax break from the government on stamp duty, dating back to Theresa May’s time in office.

Since 2017, first-time buyers have not had to pay stamp duty on a first home purchase up to the value of £300,000. Between £300,001 and £500,000 the buyer would only have to pay 5% based on the remaining £200,000. So, if a first-time buyer purchased a home worth £500,000 they would pay £10,000, £5,000 less than normal.

So many LISA holders looking to buy their first home were already in receipt of a considerable break.
 

What the stamp duty holiday actually means for LISA holders

The reality of the holiday is it is good news for those first-time buyers who were looking to purchase their first home worth over £300,000. Anyone buying below this threshold was not liable for the tax anyway.

There is another caveat to the news for LISA holders too. The LISA can only be used for a house deposit on property up to a value of £450,000. This effectively caps the value of the house you would be allowed to buy with the account.

A first-time buyer looking to buy at the top end of the LISA cap then stands to save £7,500 in tax, compared with the previous first-time buyer exemptions.

That being said, the vast majority of first-time buyers won’t be affected by this as average house prices in the UK are a lot lower – around £231,000 according to the latest figures from the Office for National Statistics.

Another issue for newer LISA holders, specifically ones who took out the product after 31 March this year, is they have to wait 12 months before being able to use their deposit to buy a house. This means anyone with a LISA opened after that date will not be able to take advantage of the scheme either, as it will have expired by the time they are allowed to use their savings.

In practice not much has then changed for LISA holders looking to buy their first home then. Those that fall into the £300,000-£450,000 house price category for their first home will save up to thousands of pounds in taxes, but for the rest it is business as usual.

However, this does not detract from the usefulness or generosity of either the holiday or indeed the LISA. The government bonus on the account is a real help to what is in fact the greatest barrier to homeownership – high prices and deposit requirements. Ultimately the tax costs are just a smaller part of this bigger puzzle.

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