Reduced the Lifetime ISA withdrawal charge to 20% for first-time home purchases exceeding the price cap and established refund procedures for failed completions.
These Regulations amend the Individual Savings Account Regulations 1998 to lower the financial penalty for Lifetime ISA (LISA) holders who use their savings to buy a first home that exceeds the statutory price cap.
The instrument reduces the withdrawal charge from 25% to 20% for these specific cases and mandates that account managers refund the charge if a purchase fails and the funds are returned to the account.
These rules apply to LISA account managers and investors in relation to all withdrawals made on or after 29 October 2026.
Arguments For
The regulations state that the withdrawal charge is reduced from 25% to 20% for individuals using Lifetime ISA funds for a first-time residential purchase that exceeds the property price cap.
Proponents argue this adjustment provides relief to first-time buyers who select properties above the current price limit while maintaining the account's purpose as a long-term savings vehicle.
The document specifies that if a home purchase exceeding the price cap fails to complete, the withdrawal charge must be restored to the investor's account, ensuring no financial penalty for unsuccessful transactions.
The order establishes a legal basis for account managers to correct tax returns and recover previously paid withdrawal charges from HM Revenue and Customs in the event of a failed purchase.
Arguments Against
Legal scholars may note that the regulations do not increase the property price cap itself, meaning these purchases still technically fail to meet the standard qualifying criteria for a tax-free withdrawal.
Financial institutions may identify administrative complexities in distinguishing between 20% and 25% withdrawal charges when processing transactions and correcting tax returns.
Housing advocates have argued that a reduced penalty does not address the underlying issue of rising property prices outpacing the fixed £450,000 Lifetime ISA limit.
Affected agencies must implement specific reporting changes immediately, as the regulations take effect only one day after being laid before Parliament.
Citation, commencement and effect
1.—(1) These Regulations may be cited as the Individual Savings Account (Amendment) (No. 3) Regulations 2026. (2) These Regulations come into force on 29th October 2026. (3) The amendments made by these Regulations have effect in relation to withdrawals made on or after 29th October 2026.
This section establishes the official name of the regulations and sets the start date as 29 October 2026.
The new rules apply to any money taken out of a Lifetime ISA on or after this specific date.
Amendment of the Individual Savings Account Regulations 1998
- The Individual Savings Account Regulations 1998 are amended in accordance with these Regulations.
This provision identifies the original 1998 Regulations as the primary legislation that is being modified.
It serves as the legal link between the new rules and the existing framework for Individual Savings Accounts.
Amendment of regulation 5D
- In regulation 5D (subscriptions disregarded for the purposes of subscription limits in regulations 4ZA(1) and 4ZB), in paragraph (2), in sub-paragraph (a), after paragraph (ib) insert—
"(ic) a repayment of a withdrawal charge under paragraph 10A of the Schedule;".
This section ensures that if a withdrawal charge is refunded to an account after a failed house purchase, that refund does not count toward the investor's annual ISA subscription limit.
It allows the account to be restored to its previous balance without violating contribution caps.
Amendment of regulation 10A
- In regulation 10A (Lifetime ISA qualifying individuals who may invest under a Lifetime ISA), in paragraph (4), after sub-paragraph (b) insert—
- "(d) a repayment of a withdrawal charge under paragraph 10A of the Schedule.".
This amendment permits the repayment of a withdrawal charge to be paid into a Lifetime ISA even if the account holder would otherwise be ineligible to make new contributions.
It treats the refund as a restoration of existing funds rather than a new investment.
Amendment of the Schedule
5.—(1) The Schedule (Lifetime ISA further provision) is amended as follows.
(2) For paragraph 5 (specified percentage of withdrawal charge) substitute—
"Specified percentage for withdrawal charge
5.. For the purposes of paragraph 8(2) of Schedule 1 (charge when unlisted withdrawal made), the specified percentage is—
(a) 20% in relation to a withdrawal to which paragraph 6A applies; (b) 25% in relation to any other withdrawal.".
(3) After paragraph 6 (first-time residential purchase) insert—
"First-time residential purchase exceeding the property price cap
6A.-.-(1) This paragraph applies to a withdrawal which would fall within paragraph 6 but for the fact that the requirement in paragraph 6(3) is not met.
(2) A withdrawal to which this paragraph applies is to be treated as if it were a first-time residential purchase falling under paragraph 6 for the purposes of—
(a) regulation 5D(2)(a)(ib), (b) regulation 10A(4)(b), and (c) paragraphs 7 to 10.".
(4) After paragraph 10 (purchase failure) insert—
"Failed purchase of property exceeding the property price cap
10A.-.-(1) This paragraph applies in respect of a withdrawal where—
(a) a withdrawal to which paragraph 6A applies has been made, (b) the account manager has deducted a withdrawal charge in respect of that withdrawal, (c) the purchase fails to complete in circumstances falling within paragraph 9(2)(b), and (d) the withdrawal is returned to the account manager in accordance with paragraph 10(1).
(2) Where this paragraph applies—
(a) the withdrawal is to be treated as a withdrawal to which paragraph 8 of Schedule 1 does not apply, and (b) the account manager must restore an amount equal to the withdrawal charge deducted in respect of the withdrawal to the account investor's Lifetime ISA.".
(5) In paragraph 13 (withdrawals: information returns), after sub-paragraph (3) insert—
"(3A) Where paragraph 10A applies, the account manager must—
(a) if no return relating to the withdrawal charge has been made under sub-paragraph (1), take account of the application of paragraph 10A in the return, or (b) if such a return has been made, correct the return without delay.".
(6) In paragraph 14 (payment to the Board of withdrawal charges), after sub-paragraph (1) insert—
"(1A) The amount payable by the account manager under sub-paragraph (1) is reduced by an amount equal to the withdrawal charge deducted in respect of the withdrawal where—
(a) paragraph 10A applies, and (b) the account manager has not paid the withdrawal charge to the Board.
(1B) The Board must repay the account manager an amount equal to the withdrawal charge deducted in respect of the withdrawal where—
(a) paragraph 10A applies, and (b) the account manager has paid the withdrawal charge to the Board.".
This detailed section sets the withdrawal charge at 20% for first-time buyers purchasing a home above the price cap, while keeping the charge at 25% for all other non-qualifying withdrawals.
It also establishes a process for account managers to refund these charges to the investor if the sale falls through, provided the funds are returned to the account.
Additionally, it requires account managers to update their tax reports and authorizes HM Revenue and Customs to repay any charges that had already been collected for failed purchases.
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