What are the best tax breaks for first time buyers buying a property?

It’s a fact that people are finding it harder than ever to get onto the property ladder and many are resigned to the prospect of renting. According to the Institute for Fiscal Studies, home ownership among young adults has collapsed over the past 20 years, particularly for those on middle incomes. This is primarily because over the past 20 years, average house prices have grown about seven times faster than the average incomes of young adults, according to an IFS study. In fact, average house prices have increased by 152% compared with inflation since 1995, although wages for 25- to 34-year-olds have only risen by 22% in real terms over the same period.

In response to this, the government has introduced a number of policies and initiatives designed to help first time buyers. Some of our clients may be interested in these, possibly with a view to supporting their children in some way with a property purchase. According to Gov.co.uk this is a very common strategy.  In 2016, 29% of first-time buyers had financial help from friends and family to buy a property. Of the people interviewed who were able to buy, 69% said it was only possible because they had help, especially to raise the deposit. In London in particular, the deposit required for an average property can now be well over £90,000.

If you are in a position to assist someone with buying their first property, here is what you need to know about the various tax incentives available for first time buyers.

What tax advantaged schemes exist for first time buyers?

The main opportunities are:

• Help to buy ISA. Available for anyone aged 16 or over, it works like a traditional ISA but with the benefit of an additional bonus payment made by the government.
• Lifetime ISA. Available for anyone under the age of 40 and also boosted with a government bonus.
• Stamp duty land tax (SDLT) relief for first time buyers. Available provided they do not already own other property, the property is being purchased for residential purposes, and the cost is £500,000 or under.

How to qualify for government backed tax schemes for first time buyers

In order to evaluate which of the government backed ISA schemes will be most beneficial to your circumstances, we have done an analysis of the main differences. They are as follows:

Criteria to qualify for a Help to Buy ISA

• ISAs must be opened by 30 November 2019 and savings must have commenced by 30 November 2029. Based on the current rules, the government bonus must have been claimed by 1 December 2030 (this may change under a new government).
• The minimum age is 16 and the applicant must be a UK resident with a national insurance number and be first time buyer (i.e. never had an interest in a property in the UK or abroad). They must also be buying the property to live in (rather than for rental or investment) and it must be purchased with a mortgage.
• Only cash savings can be invested (i.e. no shares) up to £1,200 in the first month and then £200 per month may be invested in subsequent months. Payment breaks are allowed but any missed months cannot be made up in the future.
• The government bonus available ranges from a minimum of £400 on £1,600 savings to a maximum £3,000 on £12,000 savings and is payable upon completion of a property purchase. If a property is ultimately not purchased, the bonus is not payable.
• The value of the property purchased must not exceed £250,000, or £450,000 in London.
• It’s important to note that if you decide to open a Help to Buy ISA in any tax year, it will not be possible to also open a cash ISA. If you already have a cash ISA, contributions can continue as normal.

Criteria to qualify for a Lifetime ISA

• Accounts must be opened before the saver reaches age 40 and savings must have commenced before they are 50.
• Unlike the Help to Buy ISA, the government bonus is paid out regularly at the end of the tax year and does not need to be claimed: e.g. it is paid on 6 April 2019 for the 2017/18 tax year and then monthly for the 2018/19 tax year. Again, this is based on the current rules, which may change under a new government.
• The minimum age is 18 and the applicant must be a UK resident with a national insurance number.
• Cash and share based savings are allowed of up to £4,000 per year and the entire value of the ISA may be withdrawn to purchase a property without loss of bonus, provided the ISA has been open for a minimum of 12 months.
• The value of the property purchased must not exceed £450,000 and the proceeds from the ISA must be used to offset the cost of a first property purchase or any bonus received is repayable.
• Only one Lifetime ISA can be opened in the same tax year. If you already have another cash ISA, contributions can continue as normal.
• If a property is not ultimately purchased, withdrawals can be made once the holder is aged 60, or if they have a terminal illness. Any other withdrawals will face a 25% penalty charge.

As this comparison highlights, although the Help to Buy ISA offers a generous bonus, it is significantly more restrictive than the Lifetime ISA. In some cases, taxpayers may wish to make a switch if they already have a Help to Buy ISA. This is possible for the 2017/18 tax year only, with existing transferred savings being counted as part of the £4,000 annual limit for bonus calculation purposes, provided they were already held in the ISA on 5 April 2017.

There are always tax implications when purchasing a property, whether it is for residential or investment purposes. If you have any questions, please contact Lesley Stalker by emailing partners@rjp.co.uk.