First Time Buyer in the UK - how does it work?

Welcome to another post on our blog about mortgages in the UK. In today’s article, I will provide information on the purchase of property by First Time Buyers, i.e. people buying a house or apartment for the first time.

First time buyer w UK - how does it work?

I think this is an interesting topic for several reasons. First of all, our readers often ask about First Time Buyers in the UK and how buying a property in this situation works. In addition, many people don’t know that when buying a house or apartment in the UK for the first time, they can take advantage of certain tax breaks and government programs. This knowledge can help them purchase their first property.

Who is first time buyer?

Below is information from an official HM Revenue & Customs document on who can qualify as a first time buyer:

In order to be considered a first-time buyer, the purchaser must not, either alone or with others, have previously acquired an interest in a dwelling or an equivalent interest in land located anywhere in the world.

Source: Stamp Duty Land Tax: relief for first time buyers – guidance note

Let’s clarify right away that ‘major interest’ here does not mean majority interest. What is meant here is any shareholding. So if someone bought an apartment or house jointly with other people, then unfortunately he or she can no longer be a First Time Buyer, regardless of the percentage interest in the previously purchased property.

The last thing to clarify is what the situation is when buyingfreehold and leasehold properties. It does not matter, if we bought leashold before then we are no longer First Time Buyer (and vice versa).

Benefits of being a First Time Buyer in the UK

There are a number of government programs available to first-time buyers that can help them buy property. Especially for people who have a small deposit.

Here are some of the available solutions that first time buyers can take advantage of:

First Homes Scheme

A very important government support scheme for first-time buyers is the First Homes Scheme. It involves giving discounts on newly built properties. The basic discount is 30%, but local authorities can reduce this to as much as 50% - given that we are talking about property prices here, these amounts are very large indeed and can significantly help people buying their first home.

The requirement for such discounts is forced on developers by local authorities. Of course, they have several benefits from this, but usually the discounts are the result of the conditions of the planning permission, which is granted when the developer agrees to make a certain number of built dwellings available for participation in the scheme. Once such a flat is enrolled in the scheme, it is covered by the forever discount, meaning that if the owner wants to sell it, another First Time Buyer will also receive a discount - making the forever flat more readily available to new generations of first time buyers.

In order to focus the scheme on helping those most in need, there are some additional eligibility conditions. Not only do you need to have First Time Buyer status to benefit from the First Homes Scheme, but your household income must not exceed £80,000 (or £90,000 in London). In addition to this, properties are also subject to a price cap - the price of one cannot exceed £250,000 or £420,000 in London.

Remember that the **First Homes Scheme is only available in England and the rules may vary from region to region **- local authorities may adjust some conditions, such as giving priority to key workers (such as teachers or those working in the NHS) or introducing local connection criteria that only allow people who already live in the area to participate.

Are there any alternatives to the First Homes Scheme in other countries in the UK?

Unfortunately, you won’t find schemes in other UK countries that offer property discounts. However, each has its own assistance programmes to help property buyers.

• If you are thinking of buying a home in Scotland, there is the Low-cost Initiative for First Time Buyers (LIFT) scheme, which allows you to buy aShared Ownership property with the state.

• If you are buying a home in Wales, the government offers equity loans and, as in Scotland, a shared ownership purchase.

• In Northern Ireland, the issue is handled slightly differently. First Time Buyers have several options. The first is shared ownership - this works in a similar way to other countries. If they are tenants, using the Northern Ireland Housing Executive (NIHE) scheme they can get a discount on their purchase, the amount of which will depend on the length of their tenancy. Even if they are not yet renting, they can benefit from what is known as Rent to Own. This scheme commits them to renting a property for up to three years, during which time they will take steps to improve their credit rating. At the end of this period, tenants can buy the property, receiving back 20% of the rent they have paid so far.

Lifetime Individual Savings Account (LISA)

The LISA can be used to buy your first home (for a property costing £450,000 or less) or to subsidize your later retirement. To take advantage of the LISA, you must be between the ages of 18 and 39.

You can contribute up to £4,000 each year until age 50. Your first ISA contribution must be made before age 40. The government will add a 25% bonus to your savings, up to a maximum of £1,000 a year.

If you are buying with another first-time buyer who also has a LISA, you can both use your LISAs for the same property.

Note that there is a penalty for taking money out of your LISA if you don’t put it toward a deposit or pension when you turn 60.

Lower Stamp Duty Land Tax

Many first-time buyers do not realize that they qualify for Stamp Duty Relief. This puts them in an enviable position compared to existing property owners. What exactly is Stamp Duty and what do you need to know as a first-time buyer?

Stamp Duty Land Tax (SDLT) is paid to HMRC by the buyer, usually when:

• Acquires a freehold property;

• Acquires a new or established leasehold;

• Purchases a house or apartment through a shared ownership program.

Standard SDLT rates for properties purchased in current tax year are:

• 0% on property value up to £125,000;

• 2% on the next £125,000 - the portion between £125,001 and £250,000;

• 5% on the next £675,000 - the portion between £250,001 and £925.000;

• 10% on the next £575,000 - the portion between £925,001 and £1.5 million

• 12% on any remaining amount - for the part above £1.5 million.

Below is information about this tax in a situation where we are First Time Buyer. As we will see, such individuals qualify for the relief.

• If you are a first-time buyer in England or Northern Ireland, you will pay no Stamp Duty on properties valued up to £300,000;

• If the property you are buying is between £300,000 and £500,000, you will pay no Stamp Duty on the first £300,000, followed by a reduced rate of 5% SDLT on any value between £300,001 and £500,000;

• If you purchase a property with a value above £500,000, you will have to pay standard Stamp Duty rates and will not qualify for first-time buyer relief.

More information about this tax and a helpful tax calculator can be found on our website: What is Stamp Duty land tax?

That’s all this time. I hope you already know the benefits of being a First Time Buyer in the UK and how it works. There are several valuable blog posts on buying a house or apartment in the UK. I encourage you to read a few of them: How to buy a house in the UK, Buying a house in the UK step by step.

As always, I also encourage you to contact me if you need help choosing the right government program or need a competent mortgage broker to advise and help you buy your first home