The Lifetime ISA aka LISA

Investing Mar 20, 2019

With just 2 weeks left until the end of the tax year, now is the time to look at all the options available to reduce your tax bill for the year 18/19.

We have written a detailed article on the subject in the past and most taxpayers are aware of the more popular options such as pension contributions and investments into ISA or EIS.

One container however which is often overlooked is the Lifetime ISA aka LISA. It was introduced in 2017 and can be used in conjonction with the other vehicles (even though the total amount for both ISA and LISA remain capped at £20,000). As with a regular ISA, all income and gains inside the container are tax free. But as with a pension, money contributed up to £4,000 will receive a 25% top-up from the government. All the specifics are described in the article mentioned above so please refer to it for more details but here is a list of scenarios where investing in a LISA makes sense:

You plan to purchase your first home soon

Obviously, this is the main use case for that product, and it therefore makes sense to use it in that case. The only constraint is that the house be less than £450,000.

You are a basic rate band taxpayer

If you are basic rate band taxpayer, i.e. your marginal tax rate is 20%, the tax benefit you get from the LISA is identical to the one you get from a pension. But with a LISA the money is blocked for a much shorter period since you can get the money out when you purchase your first home. If you don't have a property yet, this is therefore a great option for you to look at.

You have maxed out your pension

If you have already maxed out your lifetime pension allowance or your annual contributions, contributing to a LISA as well makes sense. Even if you don't need to purchase a home (because you already have one), this allows you to in effect increase your pensions contributions (albeit at a lower relief rate if you are in a higher tax band). Once you reach 60 – or if you are terminally ill – you can take the money out tax free and nothing prevents you at that point to contribute the proceeds into your pension to get a second relief (that is unless HMRC changes the rules...)!

You have kids that you intend to help them purchase their home

If you intend to gift money to your kids at some point to help them climb the property ladder, it makes sense to open a LISA for each one of them once they reach eighteen. You can then gift each one of them £4,000 per annum and it will be topped up by an additional £1,000 from the government. On top of that if those gifts come from disposable income (which is easier to achieve this way than when you give a house deposit in one go) those will remain outside the inheritance tax net.


Franck Sidon

With over 15 years of experience as a Managing Director at TaxAssist Accountants, I have helped thousands of businesses and individuals achieve their financial goals and optimize their tax efficiency.