Lifetime ISA withdrawal penalty: the 25% charge explained

What counts as a Lifetime ISA withdrawal penalty?

It is a 25% charge the government applies when you take money out of a Lifetime ISA for a reason other than buying your first home, reaching age 60, being diagnosed with a terminal illness, or dying. Gov.uk calls this an unauthorised withdrawal, and your ISA manager deducts the charge automatically before you receive the money. For the full rules on opening and paying into a Lifetime ISA in the first place, see our Lifetime ISA guide.

The reason it costs more than simply losing the bonus is that the 25% is charged on the whole amount you withdraw, savings and bonus together, not only on the bonus portion. That is what turns a bonus clawback into a real loss of your own money.

How much does the charge actually cost you?

Here is a worked example using the maximum annual Lifetime ISA contribution, to show the mechanism clearly. It assumes no interest or investment growth, so the numbers isolate the effect of the charge itself. The same 6.25% loss applies proportionally at any savings level.

• You pay in the maximum £4,000 for the tax year, which sits inside your overall £20,000 ISA allowance.
• The government adds a 25% bonus of £1,000.
• Your pot before any withdrawal is £5,000.
• Withdraw it all for a reason that is not charge-free, and a 25% charge applies to the full £5,000: £1,250.
• You receive £3,750 back.

That is £250 less than the £4,000 you actually paid in, a loss of 6.25% of your own money, on top of losing the entire bonus.

The maths of the 25% charge

You pay in

£4,000

The maximum annual limit

Government bonus (25%)

£1,000

Pot before the charge

£5,000

25% charge deducted

£1,250

You receive £3,750 back

When can you withdraw without a charge?

Gov.uk sets out four charge-free reasons:

• Buying your first home, under the conditions in the next section.
• Reaching age 60. From that point you can withdraw the full amount, savings, bonus and any growth, with no charge at all, and further growth stays tax-free.
• Being diagnosed with a terminal illness and given under 12 months to live.
• Dying. Your Lifetime ISA ends on the date of death, and there is no charge on the funds or investments passed on.

Outside those four situations, the 25% charge applies to whatever you withdraw.

What are the rules for a first-home withdrawal?

To withdraw charge-free for a first home, gov.uk requires all of the following:

• The property costs £450,000 or less.
• You are buying at least 12 months after your first payment into the Lifetime ISA.
• You are buying with a mortgage, and it is not a private mortgage from a parent, grandparent, child, grandchild, sibling, spouse, civil partner, or their relatives.
• You use a conveyancer or solicitor, and the ISA provider pays the funds directly to them rather than to you.

Gov.uk’s technical guidance for conveyancers shows the £450,000 limit has applied since first-home withdrawals began on 6 April 2018, and today’s gov.uk guidance still uses the same figure.

If you are buying with someone who also holds a Lifetime ISA, you can each use your own savings and bonus towards the same property, as long as you are both first-time buyers meeting the conditions above. If you also hold a Help to Buy ISA, you can only put one of the two bonuses, not both, towards the same purchase. You can transfer Help to Buy ISA savings into a Lifetime ISA, but moving money the other way, from a Lifetime ISA into a Help to Buy ISA, counts as an unauthorised withdrawal and triggers the 25% charge. See our Help to Buy ISA guide for how that scheme works.

How does a house-purchase withdrawal work, and how long does it take?

Your conveyancer handles the withdrawal on your behalf, not you directly. You give them the details: how much to withdraw, your Lifetime ISA manager and account number, confirmation you are a first-time buyer, and the property’s price and address, among other things gov.uk specifies. Your conveyancer then sends your ISA manager a declaration confirming the purchase, along with their own registration details.

Once the manager has that declaration, gov.uk says they should pay the funds to your conveyancer within 30 days. The charge-free withdrawal will not go ahead if the manager has reason to doubt the information provided, or if it falls within the 12-month minimum holding period. After completion, your conveyancer must tell the ISA manager within 10 business days, confirming the completion date and account details.

To see what your own bonus could be worth before you get this far, try our Lifetime ISA calculator.

What happens if the purchase falls through?

Gov.uk’s Lifetime ISA regulations require the purchase to complete within 90 days of your conveyancer receiving the withdrawn funds. If the sale fails, or simply is not done in time, your conveyancer must, within 10 business days of the 90 days running out, send the ISA manager a declaration and return the full amount that was withdrawn.

If what comes back is less than what was withdrawn, gov.uk treats that shortfall as a withdrawal in its own right, and the 25% charge applies to it. If a purchase is still going ahead but will not complete inside 90 days, your conveyancer can ask the ISA manager for a 60-day extension, and a further 30 days after that if needed; the manager has to report any extension to HMRC. Any interest earned while your conveyancer is holding the money is paid to you directly and is not treated as a withdrawal.

A failed purchase does not cost you your right to use a Lifetime ISA for a future one, only the specific attempt that did not complete.

Does transferring a Lifetime ISA trigger the charge?

It depends entirely on where the money goes.

Transferring a Lifetime ISA to a new Lifetime ISA manager, for a better rate or a different provider, does not trigger the 25% charge. Gov.uk requires the transfer to happen within 30 calendar days of your request, with no limit on the amount, and any current tax year payments must move across in full. Our general ISA transfer guide covers how this works in practice.

Transferring a Lifetime ISA into a different type of ISA is treated differently. Gov.uk classes this as a withdrawal from the Lifetime ISA, so the 25% charge applies, unless the transfer happens after your 60th birthday or you have declared a terminal illness.

Where this leaves you

None of this is a reason to avoid a Lifetime ISA if you are confident about buying a first home within the rules above, or if you are 60 or close to it. The charge only bites when a withdrawal falls outside those situations, commonly because plans changed and the money was needed for something else.

If you think you might need access to the money for a reason other than a first home before age 60, it is worth weighing that risk against the 25% bonus before committing large sums, alongside alternatives, including a pension, covered in our ISA versus pension comparison. The government has also consulted on a new First Time Buyer ISA intended to eventually replace the Lifetime ISA for home saving with no withdrawal charge at all, though that has not launched. For independent, free guidance on your own situation, MoneyHelper is a good starting point. Tax treatment depends on your circumstances and may change.