Individual Savings Accounts: Lifetime ISA
Published 22 February 2017
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Who is likely to be affected
Individual savers who open a Lifetime ISA, banks, building societies and other financial institutions who offer Lifetime ISAs and conveyancers acting for first-time homebuyers who hold a Lifetime ISA.
General description of the measure
The measure establishes a new tax-advantaged savings account, the Lifetime ISA, from 6 April 2017. UK resident adults under the age of 40 will usually be eligible to open a Lifetime ISA. Account holders will be able to save up to £4,000 each tax year in their Lifetime ISA until they reach 50, and amounts they pay into their account will be eligible for a 25% government bonus. Account holders can withdraw their Lifetime ISA savings at any time, but from 6 April 2018 any withdrawals made other than in specified circumstances (such as when the account holder reaches 60, is withdrawing their savings for a first-time residential purchase or is terminally ill) will be subject to a 25% charge.
Policy objective
To support savers at all stages of their life, including by increasing choice for consumers and helping younger people save flexibly for the long term.
Background to the measure
The government announced at Budget 2016 that it would introduce the Lifetime ISA from April 2017.
The Savings (Government Contributions) Act 2017, which makes provision for the Lifetime ISA, was introduced to Parliament in September 2016 and received Royal Assent on 16 January 2017. An impact assessment covering Lifetime ISA was published alongside this Bill on 1 September 2016.
Draft regulations setting out further detail on the Lifetime ISA account rules were published for consultation on 27 October 2016. This consultation closed on 6 January 2017.
Detailed proposal
Operative date
The measure will have effect on and after 6 April 2017.
Current law
Account rules for ISA are set out in the Individual Savings Account Regulations 1998 (SI 1998/1870) (ISA Regulations), which are made under powers in sections 694 to 701 of the Income Tax (Trading and Other Income) Act 2005 and section 151 of the Taxation of Chargeable Gains Act 1992.
ISA regulations currently provide for 3 different types of ISA for adult savers (cash ISA, stocks and shares ISA and innovative finance ISA). They specify the investments which can be held in each of these accounts, who is eligible to offer accounts and the annual subscription limit - as well as other account features and requirements.
The Savings (Government Contributions) Act 2017 makes provision for, and in connection with, government bonuses and other account features for the Lifetime ISA.
Proposed revisions
The ISA regulations will be amended by secondary legislation to establish a new type of ISA - the Lifetime ISA, and to set out detailed eligibility conditions and rules for this new account.
As a result of these changes, a Lifetime ISA may be opened by an adult who is below the age of 40 and satisfies a UK residency requirement and other conditions. UK resident account holders can continue to pay into their accounts until they reach 50, and will earn a government bonus of 25% on the amount they pay into their account. There will be a £4,000 limit on the amount an account holder can pay into their Lifetime ISA each year. However, any amount held by a saver in a Help to Buy ISA on 5 April 2017 can be transferred to a Lifetime ISA during the tax year 2017 to 2018, without this counting towards the £4,000 Lifetime ISA limit. Any type of investments which would currently qualify to be held in a cash ISA or a stocks and shares ISA can be held in a Lifetime ISA.
The amendments to the ISA regulations will also set out arrangements for account provider claims and payment of bonus amounts, and for the collection and payment of the charge that will apply to certain withdrawals from a Lifetime ISA after 6 April 2018. This charge will be set at 25% of the withdrawn amount.
Detailed rules concerning the circumstances in which withdrawals can be made from a Lifetime ISA without this charge will also be set out in the ISA regulations. These circumstances include a withdrawal made after an account holder reaches 60, becomes terminally ill, or dies. The ISA regulations will also set out when a withdrawal can be made without charge for the purchase of a residential property by a first-time homebuyer from 6 April 2018. In such cases, the withdrawn amount must be paid by the account provider to the account holder’s conveyancer for the purchase.
Consequential changes will be made throughout the ISA regulations to accommodate Lifetime ISA. These include modifications to current arrangements for the repair of accounts, account transfers and the information that account providers are required to supply to HM Revenue and Customs (HMRC).
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| negligible | -170 | -340 | -590 | -850 |
These figures are set out in Table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. Further detail can be found on page 9 of the policy costings document published alongside Budget 2016.
Economic impact
The measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
The Lifetime ISA will provide an additional savings option for younger people looking to save flexibly for the longer term, and will provide savers with a 25% bonus on the amount they have added to the account. Bonus amounts earned during the tax year 2017 to 2018 will usually be paid by HMRC after the end of that tax year. In subsequent tax years, bonus amounts will be paid monthly.
There will be a £4,000 limit on the annual amount that an account holder can pay into their Lifetime ISA, making the bonus worth up to a maximum of £1,000 each year. It is estimated that there will be over 200,000 Lifetime ISA savers in the tax year to 5 April 2018, saving on average £3,500 per year into their accounts.
From 6 April 2018, account holders withdrawing amounts from their Lifetime ISA, other than in specified circumstances, will be liable for a 25% withdrawal charge. This charge returns the government bonus element (including any interest or growth on that bonus) to the government with a small additional charge applied, intended to reflect the long-term nature of the product.
Further analysis of the impact of Lifetime ISA on individuals is set out in the Impact Assessment for the Savings (Government Contributions) Bill.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
To open a Lifetime ISA, an individual must be an adult under 40, and account holders can only pay into their account, and thereby earn a government bonus, until they reach 50. Targeting Lifetime ISA eligibility on these age groups reflects the policy intent to help younger people save flexibly for the long term, a key theme raised by respondents to the government’s 2015 consultation on Pension Tax Relief.
Other than those affected by the targeting of the Lifetime ISA eligibility by age, it is not anticipated that the new account will particularly impact upon any groups sharing protected characteristics.
Impact on business including civil society organisations
Financial institutions who choose to offer Lifetime ISAs are likely to face one-off costs, including those arising from the development of new systems and processes for government bonus claims, withdrawal charges and reporting to HMRC, as well as costs associated with familiarising staff with the rules of the new account. Ongoing costs will include those connected with calculating, claiming and paying government bonus amounts and, from 6 April 2018, deducting withdrawal charges and paying these to HMRC. There will also be ongoing costs in relation to the provision of information to HMRC and account holders, and the operation of the Lifetime ISA payment limits and other account rules.
There are currently around 500 ISA providers, and it will be a commercial decision for each provider whether they choose to offer the Lifetime ISA. Each Lifetime ISA provider’s costs will vary, depending, for example, on the number of customers they are intending to serve. However, Lifetime ISA is expected to increase business for ISA providers that do offer the account.
Detailed evidence necessary to enable an assessment of the total impact across all Lifetime ISA providers is not currently available. HMRC will continue to work with ISA providers and their representatives to fully quantify the impacts.
There will also be costs from April 2018 for conveyancers acting for Lifetime ISA holders who are purchasing their first home and wish to make a charge-free withdrawal from their account. One-off costs for conveyancers include the need to familiarise themselves and their staff with the relevant rules and processes. Ongoing costs include those associated with supplying information to an account provider at the time that the amount is withdrawn, and also later, following the completion of the house purchase or the failure of a purchase to complete. Detailed evidence necessary to enable an assessment of the total impact on conveyancers is not currently available. HMRC will continue to work with conveyancers and their representatives to fully quantify the impacts.
Further analysis of the impact of Lifetime ISA on businesses is set out in the Impact Assessment for the Savings (Government Contributions) Bill.
There is no disproportionate or significant impact on small and micro businesses as opposed to other businesses (for example, mid-size and large).
Operational impact (£m) (HMRC or other)
The cost to HMRC of developing Lifetime ISA systems and processes is currently estimated to be around £3 million to £3.5 million. Further analysis of the impact of Lifetime ISA on government is set out in the Impact Assessment for the Savings (Government Contributions) Bill.
Other impacts
The Lifetime ISA rules include rights for account holders or account providers to appeal against certain HMRC decisions, and this could increase the number of appeals heard at tribunal. However, it is anticipated that such appeals will be rare, given the clarity of the Lifetime ISA rules. Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure is subject to ongoing review through the information given to HMRC by account providers, HMRC’s compliance work, as well as HMRC and HM Treasury’s discussions with ISA providers, consumer groups, conveyancers and other interested groups.
Further advice
If you have any questions about this change, contact Helen Williams on:
- telephone: 03000 512 336
- email: savings.audit@hmrc.gsi.gov.uk
Declaration
Jane Ellison MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.