Rachel Reeves urged to scrap LISA penalty to help Oxford buyers

Under the current rules, Lifetime ISA withdrawals are only authorised for retirement spending and first-time property purchases up to the value of £450,000, which is lower than the average house price in Oxford, according to latest Land Registry figures.

The government imposes a 25 per cent penalty on the total value of the investment pot at its closure for withdrawals outside these criteria.

This penalty strips out not just the 25 per cent government bonus but also a chunk of the interest or investment growth too.

Chancellor of the Exchequer Rachel Reeves (Image: Jordan Pettitt/PA) Data released to smart money app Plum by HMRC following a Freedom of Information request has revealed around 74,000 savers nationwide 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.

The top 25 penalties imposed by HMRC averaged £11,000 each.

Rajan Lakhani of Lifetime ISA provider Plum said: "Rachel Reeves needs to do the right thing and realise that the current ceiling is shutting people out of the Oxford housing market.

"The Chancellor has put home ownership at the centre of the Labour party’s programme for government.

"Which is 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."

If the purchase limit had been index-linked in 2017 when Lifetime ISAs were first launched, the cap would now stand at roughly £583,000.

Mr Lakhani added: "The Lifetime ISA is a powerful weapon for first-time buyers looking to build a deposit, but there is a growing consensus that some of the rules introduced in 2017 are starting to look a little outmoded.

"The upcoming budget offers Rachel Reeves the perfect opportunity to fine-tune the current Lifetime ISA rules so young families can realise the dream of home ownership sooner.

“Even losing a sum of £1,000-£2,000 can be a massive set-back for a young couple shopping for their first home. It represents the cost of a home survey, or your removal fees.

“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, Rachel Reeves can empower first-time buyers in Oxford and right around the country to buy the properties they actually need without fear of being penalised."