Rachel Reeves is being urged to scrap Lifetime ISA penalties in this month's budget as some first-time buyers are being charged penalties of more than £11,000 on withdrawals.
A freedom of information request by smart money app Plum, revealed the penalties handed down by HMRC for “unauthorised withdrawals”, including breaches of the house price cap.
The data revealed around 74,000 savers were hit with penalties in 2022-23, including 15,977 who were forced to hand back £1,000 or more.
Some 6,139 savers were hit with penalties of more than £2,000 while 851 potential homebuyers were fined more than £5,000.
Under the current rules, Lisa withdrawals are only authorised for retirement spending and first-time property purchases up to the value of £450,000.
While there are multiple reasons savers can be penalised, the current house price cap has attracted the most criticism, as buyers become subject to a 25 per cent penalty on the total value of the savings pot for withdrawals that breach the criteria.
Rajan Lakhani from Plum, said: “These findings show how the current ceiling is shutting people out of the housing market. There are currently dozens of local authorities across the country where the average house price is greater than the £450,000 cap, and that number is only set to rise in the future.
“The chancellor has put home ownership at the centre of the Labour party’s programme for government. That’s why it makes sense to index-link the Lifetime ISA ceiling from the time of its launch and bring in a new limit closer to £600,000.”
The top 25 penalties imposed by HMRC averaged £11,000 each with 28 local authorities outside London average above the £450,000 cap.
These included Brentwood, Essex (£467,357), Sevenoaks, Kent (£500,569) and St Albans, Hertfordshire (£584,360) with London’s average property price standing at £536,521.
According to Plum, if the purchase limit had been index-linked in 2017 when Lisa’s were first launched, the cap would now stand at roughly £583,000.
“The upcoming budget offers Rachel Reeves the perfect opportunity to fine-tune the current Lisa rules so young families can realise the dream of home ownership sooner," said Lakhani.
She said losing out on between £1,000-2,000 could be a major set-back for young couples, representing the cost of a home survey or removal fees.
Lakhani added: "Buying a first home is a huge decision, and the market has moved significantly since 2017. House prices have risen – but policy has not caught up.
“By raising the property price limit to a more equitable £600,000, Reeves can empower first-time buyers to buy the properties they actually need without fear of being penalised."
alina.khan@ft.com
