A Foot On The Ladder: Tax Incentives For First-Time Buyers

Lindsey Wicks takes a look at the tax incentives available for first-time buyers.

There are three main tax incentives for those looking to get a foot on the housing ladder. These are:

the help-to-buy individual savings account (ISA);
the lifetime ISA; and
stamp duty land tax (SDLT) relief for first-time buyers.

This article considers these incentives and the qualifying criteria for each of them.

Saving for a home

Not only are income or gains tax-free in the help-to-buy ISA and the lifetime ISA, the savings are boosted by a 25% government bonus. However, the government bonus can only be used from one of them to buy a first home, so what are the differences?

	Help-to-buy ISA	Lifetime ISA
Deadline for opening an account	30 November 2019	Before the saver turns 40
Deadline for making savings	30 November 2029	Before the saver turns 50
Deadline for claiming the government bonus	1 December 2030	Bonus paid regularly and not subject to a claim
Minimum age for opening an account	16	18
Conditions to be met when opening an account	UK resident, National Insurance (NI) number, first-time buyer*	UK resident, NI number
Form of savings	Cash only	Cash or stocks and shares
Restrictions on other ISA savings	Cannot have another cash ISA in the same tax year (although steps can be taken if a cash ISA has already been opened)	Cannot have another lifetime ISA in the same tax year
Savings limits	Initial deposit of up to £1,200 and then up to £200 per month	£4,000 per annum
Limits on government bonus	Minimum bonus is £400 (on £1,600 savings) and maximum is £3,000 (on £12,000 savings)	Up to 100% of the savings can be withdrawn to purchase the first home at least 12 months after the first subscription into the lifetime ISA
Timing of bonus payment	On completion of home purchase	At the end of the 2017/18 tax year and monthly from 2018/19 onwards
Qualifying property purchases	The purchaser must be a first-time buyer* and the property purchased must: · be in the UK; · have a purchase price of up to £250,000 (£450,000 in London); · be the only home owned by the purchaser; · be occupied by the purchaser (with a relaxation for members of the armed forces); · be purchased with a mortgage	The purchaser must be a first-time buyer* and the property purchased must: · be in the UK; · have a purchase price of up to £450,000; · be the only home owned by the purchaser; · be occupied by the purchaser (with a relaxation for members of the armed forces); · be purchased with a mortgage
Use of bonus/withdrawal	Bonus (plus any interest on the bonus) applied towards the acquisition of the property only	Withdrawal used towards defraying the purchase price of the property only
Can withdrawals be made if a home is not purchased?	Yes, but no government bonus is paid	Withdrawals can be made upon reaching the age of 60 or on terminal illness. Other withdrawals are subject to a 25% penalty charge

*Similar definitions of first-time buyers apply to both forms of ISA. Essentially, a would-be home owner must never have held a residential property interest (including as a beneficiary of a trust) anywhere in the world. See the definitions of ‘First time buyer’ and ‘Residential property owner’ in the Help to Buy ISA Scheme Rules (www.helptobuy.gov.uk/documents/2015/12/scheme-rules.pdf) and ‘First-time buyer’ and ‘Residential property owner’ in the Individual Savings Account Regulations 1998 (SI 1998/1870), as amended by SI 2017/466.

Joint purchasers meeting the eligibility criteria can each open a help-to-buy ISA and/or a lifetime ISA, allowing couples to each qualify for government bonuses, but the purchase price caps apply to the property as a whole.

Trap:

Transferring from a help-to-buy ISA to a lifetime ISA

For the 2017/18 tax year only, funds held in a help-to-buy ISA at 5 April 2017 can be transferred to a lifetime ISA without counting towards the 2017/18 lifetime ISA subscription limit, meaning the 25% bonus is potentially available on the combined balance. Otherwise, any transfers of prior year subscriptions from other ISA types to a lifetime ISA count towards the £4,000 lifetime ISA subscription limit.

SDLT relief for first-time buyers

Since 22 November 2017, SDLT relief is available to first-time buyers on residential property purchases of £500,000 or less. Where the purchase qualifies for relief, the following SDLT rates apply:

Consideration	Rate
Up to and including £300,000	0%
£300,001 - £500,000	5%

The relief applies to purchases in England, Wales, and Northern Ireland, although it will only apply in Wales until 1 April 2018 when land transaction tax comes into force. Relief is not available if the purchase is of an additional dwelling subject to the higher rates of SDLT.

The definition of a first-time buyer is similar to the definitions used for the ISAs but uses terminology consistent with the SDLT legislation.

Trap:

Joint purchasers

All purchasers must be first-time buyers and intend to occupy the dwelling as their main residence to qualify for the SDLT relief.

Practical Tip:

Understanding the purchaser’s worldwide historic property holding interests is key to establishing whether they meet the definitions of a first-time buyer.