‘Lifetime ISA reform rumours won’t fix the flaw – Reeves must address the property price problem’

“I’ve stopped paying into my Lifetime ISA now. I don't think it's worth it,” a friend explained. The rest of the group, mostly renters in their early 30s, nodded in support as she explained her plight – the property cap (which has been frozen at £450,000 since the Lifetime ISA launched in 2017) is becoming more and more restrictive if you want to buy in London. The increasing likelihood of paying an effective 6.25% penalty on your hard-earned savings if your dream home exceeds this threshold makes the account much less appealing – putting money elsewhere gives you more choice.

I remember discussing the Lifetime ISA (LISA) when it first launched, almost a decade ago, with a group of friends who were long term renters in the capital. It was replacing the Help to Buy ISA, and the Lifetime ISA seemed to be a welcome improvement.

Each tax year, you can save up to £4,000 in a Lifetime ISA and get a 25% (up to £1,000) boost from the government. With the Help to Buy ISA, which you can no longer open, you can pay in £200 a month and also get a 25% top up, but the overall maximum bonus is £3,000.

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I ran the calculations – if you could afford to max out your Lifetime ISA for more than three tax years, you would end up with a greater bonus via the Lifetime ISA. Plus the 25% boost is paid into your account the following month, rather than needing to be claimed when you come to purchase, so you can benefit from compound interest (you can hold cash and/or stocks and shares in Lifetime ISA).

To get the Help to Buy ISA bonus, the purchase price of a property is capped at £250,000, or £450,000 in London. With the Lifetime ISA, it’s a blanket £450,000.

When the Lifetime ISA launched in April 2017, the average UK house price was £220,094, according to HM Land Registry. In London, the average was £482,779. But as of November 2025, the average UK house price is £271,188, and £553,258 in the capital.

While house prices have risen, the Lifetime ISA cap has failed to keep pace. If it had been uprated, the limit would have grown to £575,550 according to AJ Bell calculations in February 2025. This restricts prospective buyers who face fewer affordable options that fall within the Lifetime ISA boundaries.

Plus, bizarrely, the £450,000 cap doesn't align with first-time buyer's relief on stamp duty land tax (SDLT) – which applies on properties costing up to £500,000. As a first-time buyer you pay no SDLT on the first £300,000 then 5% on the portion from £300,001 to £500,000. Surely it’s time to uprate the Lifetime ISA property value limit to be at least in line with this relief.

How Lifetime ISA withdrawals work

Lifetime ISA withdrawal rules are stringent. You can access the cash penalty-free if you’re buying an “authorised” property (you’re buying a property costing £450,000 or less, with a mortgage, using a conveyancer or solicitor and you first paid into the Lifetime ISA at least one year ago) or if you’re 60 or older. Otherwise, unless you’re terminally ill with less than 12 months to live, you will be charged 25% on withdrawals.

Let’s say you put in £16,000 over the years. With the £4,000 bonus, you’d have £20,000, assuming no growth. You then want to buy a property for £500,000, so withdraw the entire pot. As this is just over the Lifetime ISA cap, you would pay a 25% withdrawal charge of £5,000 – leaving you with just £15,000. This works out at an effective 6.25% penalty on your savings.

A withdrawal charge is understandable given the 25% top up is applied within the tax year, but cutting it to 20% would mean HMRC can recoup the bonus if it’s not used to buy a first home. We don’t need an entirely new ISA product for that – the rate was cut to 20% during the coronavirus pandemic.

The rumoured Lifetime ISA replacement

In the 2025 Autumn Budget, chancellor Rachel Reeves announced the government will publish a consultation in early 2026, on the “implementation of a new, simpler ISA product to support first time buyers to buy a home”. It’ll be offered in place of the Lifetime ISA. It’s promising news – Lifetime ISA reform is long overdue. But HMRC this week suggested the consultation will focus on launching a new product which removes the retirement saving aspect of Lifetime ISAs and the withdrawal charge.

It seems the new product, reportedly due to launch from April 2028, will return to the Help to Buy ISA model, where the bonus is applied when the property is bought. This should “be cheaper” for the government, but potential homeowners would lose out on the “investment growth earned on the bonus during the years they save for their first house”, Rachel Vahey, head of public policy at AJ Bell, points out.

It’s not yet known whether the property value threshold will be changed. I really hope it is. If it remains frozen, the government would be ignoring the main problem with the Lifetime ISA and missing a huge opportunity to genuinely help first-time buyers get on the property ladder amid rising house prices.

I believe the Lifetime ISA is a great product for prospective homeowners, but it’s failing because the property cap hasn’t kept up with house price growth. First-time buyers are being restricted to fewer options as property prices rise, and the frozen threshold is undermining confidence in the product. Why would you commit to locking your savings for a deposit in a Lifetime ISA if you were likely to lose a chunk of the money you put in to buy your first home?

Fixing this flaw by uprating the limit is a fantastic opportunity for the government to win support from millennials and Generation Z. Launching a new product which doesn’t address the frozen threshold would just be a huge waste of time and taxpayers’ money.