Case study: first-time buyers
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Ian and Chloe are saving to buy their first homein London.They are both in their late 20’s and have both been saving using help to buy ISAs for the past threeyears.Ian and Chloe each have a help to buy ISA and make monthly deposits into their respective accounts. Ian deposited £400 into his ISA in the first month and has since saved £120 per month and Chloe deposited £1,200 into her ISA in the first month and has since saved £160.They plan to live together and to buy the house in joint names and to get a mortgage.
Chloe’s great-aunt recently passed away and left her a 25% share of her holiday home in Spain. The house is worth around £80,000 so Chloe’s share will be about £20,000. Chloe and the other beneficiaries intend on selling the property immediately once the estate has been distributed.
Help to Buy ISAs
Assuming they each meet the other conditions, as Ian has a total of £4,600 in his ISA, he will qualify for a government bonus of £1,150. Similarly, Chloe has a total of £6,800 in her ISA meaning she will potentially receive £1,700 of the maximum government bonus available; an additional £3,000. This means that together Ian and Chloe will benefit from additional government funds totalling £2,850which they will not have to pay back on their savings of £11,400.
To qualify and receive the government bonus, the purchase price of Ian and Chloe’s home must be £450,000 or less if it is located in London.They will need to instruct a solicitor or conveyancer to apply for the government funds on their behalf. The government funds cannot be used to pay the deposit which is usually paid when contracts are exchanged prior to the date of completion, or to pay fees such as solicitor’s fees or estate agent’s fees; it must make up the purchase price payable on completion.
As first-time buyers, Ian and Chloe may also benefit from stamp duty land tax (SDLT) relief. In order to qualify for this relief, the house that Ian and Chloe buy must be £500,000 or less. The first £300,000 will be SDLT free and 5% SDLT will be charged on any amount above £300,000. Considering this, and by way of an example, if Ian and Chloe purchased a house worth £400,000, they would pay no SDLT on £300,000 and 5% on £100,000 meaning that £5,000 SDLT would be payable in total.
The Issue for Ian and Chloe
A first-time buyer is an individual who has not,either alone or with others, previously acquired a major interest in residential property anywhere in the world. This includes by inheritance or gift.
Therefore, the fact that Chloe is about to inherit a share of her great-aunt’s property in Spain is problematic as this will mean she no longer meets the condition of not owning property anywhere in the world. She will be acquiring a major interest as she will own a share of a freehold property.
It may be possible for Chloe to take steps to refuse the gift, or for variations to be made to what she receives. However, this is entirely dependent on the individual facts of each case and any person considering this should seek legal advice.
Ian will still be able to benefit from the government bonus on his savings in his ISA as he has not inherited any property and therefore still meets the definition of a first-time buyer. This is because first-time buyer status applies to individuals and not to households.
However, the SDLT relief will most likely not apply if Ian and Chloe purchase the property in their joint names, as when there is more than one first-time buyer, they both need to qualify as first-time buyers to claim the relief. If Ian was to buy the property in his sole nameit may be possible for him to still get SDLT relief assuming he and Chloe are not married. However, this may not be practical and would also mean that the any mortgage would be based on Ian’s earnings alone which may result in less favourable terms and a lesser amount offered. Also, if Chloe is contributing money to the purchase, she will have no legal or beneficial title in the property so would need to consider carefully the implications should her and Ian fall out and what her rights would be to have her money returned.
Other Options – Help to Buy Equity Loan
As Chloe will not benefit from the government bonus on her ISA, Ian and Chloe may need to rethink their purchase options. One option available to them would be a help to buy equity loan. This would allow Ian and Chloe to borrow up to 40% of the cost of a new-build home worth up to £600,000. In this situation they would need to pay a 5% cash deposit and get a 55% mortgage to cover the remaining cost.
Ian and Chloe would not be charged any interest on the loan for 5 years but after this they will pay a fee of 1.75% of the loans value. This percentage would increase each year according to the RPI plus 1%. Ian and Chloe would have to pay back the same percentage as they borrowed when they sold the house even if the market value had significantly increased. For example, if they bought the house for £400,000 and borrowed 40%, they would have received a loan of £160,000. If when they sold the house it was worth £500,000, they would still pay back 40% totalling £200,000.
Alternatively, Chloe may choose to use the money from the sale of her great-aunt’s property in Spain to fund what she would have otherwise received by way of a government bonus.