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The UK government has set up a LISA scheme for first-time house buyers.

My understanding is I invest up to £4000 per year. The government adds 25% of my investment. This happens every year from when I'm 18 (2017) until I'm 50 (2049) (so the maximum investment is £128,000 and the bonus on that would be £32,000).

If I invest £4000 per year into a Stocks and Shares LISA, I would hopefully get an interest rate of ~6% and at the end of the 32 years (i.e. the year I turn 40) I would have £476,262.44.

This raises 2 linked questions.

  1. I've got £476,000 but the maximum house price is £450,000. What happens to the £26,000. Does it stay there with ~6% interest (and no bonus of course), and would be available when I retire at around 75 (there would be about £106,000 by then)?

  2. I would want to access this money, but when I'm 50 I would like to buy a house worth more than £450,000 (but I'm not planning on buying before then - I'd rather rent). Can I buy a house and "quickly" sell it again, to simply access the money, or would the government catch on and take away the bonus?

  • I guess you mean 50, rather than 40? As long as you open an account before age 40, you keep getting the bonus up to age 50. Your other calculations (32 years/2049) imply you're working on that basis. – GS - Apologise to Monica Jul 17 '17 at 22:42
  • @GaneshSittampalam Yes, I just edited to correct that. Getting confused with the bonus time and the last date of opening. I'd also overestimated the retirement amount by almost 80% because of that, so I changed the number at retirement. – Tim Jul 17 '17 at 22:44
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I've got £476,000 but the maximum house price is £450,000. What happens to the £26,000. Does it stay there with ~6% interest (and no bonus of course), and would be available when I retire at around 75 (there would be about £106,000 by then)?

Yes, anything you don't withdraw for your house purchase stays in the Lifetime ISA and keeps growing there. Also you do keep the bonus on it, which was paid at the time you subscribed, unless you make a withdrawal before age 60. After age 60 you can withdraw and keep the bonus.

Note that you need to be buying with a mortgage to be allowed to use the lifetime ISA money (without penalty). This is mentioned on the gov.uk website as well as in the actual regulations that establish lifetime ISAs (search for "first time residential purchase" and look at clause (6)).

That would mean you'd need to withdraw even less than the £450K and artificially borrow the rest.

All that said, I suspect the £450K limit would be raised by 2049, given inflation.

Can I buy a house and "quickly" sell it again, to simply access the money,

The regulations say that on completion of the purchase, you must "occupy the land as their only or main residence" (there are a few exceptions, such as if it's still being built, or if you are at the time posted abroad by the government, but essentially you have to move in as soon as possible). There's no time limit stated in the regulations, so in theory you could move in and then sell quite fast, but personally I'd be nervous about this being seen as not genuinely intending it to be my main residence. In theory you could be prosecuted for fraud if you claimed a valid withdrawal when it wasn't, though given the wording of the regulations it looks like you'd be complying with the letter of the law.

  • That's unfortunate. I wouldn't really want to risk being prosecuted for fraud, to be honest, so I think if I do start one, I'll probably just leave it there for retirement (and have a pretty tidy £1.9 million from a £128,000 investment) - or in the next few years there will hopefully be more information on how long you're supposed to live there. – Tim Jul 17 '17 at 22:56
  • @Tim I dug up the regulations now and there's no time limit stated. I'd still be quite cautious about doing something that would indicate it was a sham, though. – GS - Apologise to Monica Jul 17 '17 at 23:10
  • I expect they could probably charge me with something less than pleasant - I doubt the govt likes being swindled out of £32k. I’ll probably take it out sooner to buy an actual first home, with a 10% deposit so I’m leaving as much as I can in for retirement, live there for a few years and move on, leaving a significant sum for retirement. (Although who knows what will happen between now and 2049). Thanks! – Tim Jul 17 '17 at 23:40
  • @Tim But as Ganesh notes, it's quite possible/probable that the limit would have been raised by 2049 (assuming the scheme still exists in it's current form). – TripeHound Jul 18 '17 at 7:54
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  1. Your first home can be up to £450,000 today. But that figure is unlikely to stay the same over 40 years. The government would need to raise it in line with inflation otherwise in 40 years you won't be able to buy quite so much with it. If inflation averages 2% over your 40 year investment period say, £450,000 would buy you roughly what £200,000 would today. Higher rates of inflation will reduce your purchasing power even faster.

  2. You pay stamp duty on a house. For a house worth £450,000 that would be around £12,500. There are also estate agent's fees (typically 1-2% of the purchase price, although you might be able to do better) and legal fees. If you sell quickly you'd only be able to access the balance of the money less all those taxes and fees. That's quite a bit of your bonus lost so why did you tie your money up in a LISA for all those years instead of investing in the stock market directly?

One other thing to note is that you buy a LISA from your post tax income. You pay into a pension using your pre-tax income so if you're investing for your retirement then a pension will start with a 20% bonus if you're a lower rate taxpayer and a whopping 40% bonus if you're a higher rate taxpayer. If you're a higher rate taxpayer a pension is much better value.

  • I don’t pay any tax and won’t for the next few years, so that’s not a concern, and that 5 year head start makes a bit of a difference... – Tim Jul 18 '17 at 1:54
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    @Tim "I don’t pay any tax and won’t for the next few years" It feels surprising that you could afford to set aside £4,000pa for a few years while still being below the tax threshold. – TripeHound Jul 18 '17 at 8:01
  • @TripeHound I’ll have an 8k tax free income, so I could earn up to 11.5k without paying tax and have 19.5 per year available. It’s unlikely that I’d earn that much but even just earning 3k, I could top it up with 1k from savings and reach the limit, plus ~100 from savings interest. – Tim Jul 18 '17 at 10:06

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