Getting on to the property ladder can seem like an uphill struggle for first-time buyers, requiring them to navigate through an unfamiliar and seemingly Byzantine process replete with dangerous tax pitfalls, all waiting to trap the unwary traveller. But, as with any adventure into the unknown, a bit of forward planning can pay real dividends further down the road.
Secure your expedition’s free cash
Finances can be tight for first-time buyers and so every little counts. Helpfully, the government does offer some assistance to start the journey in the form of Individual Savings Accounts (ISAs) which offer a ‘help-to-buy’ bonus.
There are currently two kinds, a Help to Buy ISA and a Lifetime ISA (LISA), both of which offer a 25 per cent top up on the money saved by first time buyers. But there are big differences between the two – for example, a LISA has a much bigger cap on the amount of bonus which can be received but it has very restrictive rules on how the cash can be withdrawn.
It is therefore vitally important that the right account is picked at the outset. But a word of warning: new Help to Buy ISAs can’t be opened after 30 November 2019 so a decision on whether to apply should be taken without delay.
Get your support team on side
An intrepid adventurer is only as good as the support crew they leave behind at base camp and often the best support can be the “Bank of Mum & Dad” (or even that of grandparents).
While some parents might feel this invites children to conduct a devastating raid on their own financial reserves, it also has some tax benefits for the lenders. For example, making a gift of cash as a deposit and surviving that gift by seven years will reduce the value of one’s estate for inheritance tax purposes, potentially resulting in a tax saving of up to 40 per cent.
However, if the Bank of Mum & Dad want to keep their borrowers on a shorter leash, money can instead be loaned rather than gifted. This doesn’t have the same tax benefits but allows parents to keep a degree of control over their hard-earned cash.
Select your party carefully
A property tax (known as ‘LBTT’ but often called ‘stamp duty’) is payable when a property is bought and is based upon how much is paid and who the buyers are. As a result, just as the correct choice of travelling companion is vital in ensuring a successful journey, the same is true for picking who to include on the title deeds for a new property.
If all of the buyers have never owned any other property they can benefit from First Time Buyer Relief. This removes any LBTT payable on the purchase price up to £175,000, giving a saving worth up to £600.
However, if one or more of the buyers owns another home all of the purchasers become liable to pay the ‘additional dwelling supplement’ – a 4 per cent extra levy on the purchase price – in addition to any LBTT payable. There will also be no benefit from the lower rates of LBTT for first time buyers.
The result is that parents who own their own home will likely find it uneconomic to buy a property with (or for) their child while couples who are thinking of buying together (especially where one already owns a home) need to take advice on how LBTT will affect them.
Reconnoitre the best route
Even once financing has been secured and the expedition party carefully chosen, it’s best not to rush off without looking at some of the ‘shortcuts’ which might be of benefit.
These can include plans by the Scottish Government to offer first time buyers in Scotland loans of up to £25,000 to put towards their deposits, incentives offered by developers of new build properties to buy the LBTT, or entering into a shared equity scheme where the Scottish Government will pay for up to 15 per cent of the purchase price and allow their share to be bought out later.
Enjoy the journey
The path to home ownership can often be a stressful one, but don’t lose heart; with the correct guide, planning and advice, that first rung on the ladder can be summited with ease.
Alasdair Johnstone is a Partner, Anderson Strathern