First-time buyer stamp duty exemption – don’t get caught out

Stamp duty is the bane of every home buyer, with only first-time buyers being exempt from paying the tax if they purchase properties for less than £425,000.

The first-time buyer stamp duty exemption has undoubtedly helped increase the number of people getting on the property ladder, with the highest number of first-time buyers since before the financial crisis being recorded in August, recent figures show.

However, I am seeing more and more clients getting stung for the duty when they did not expect to do so as there are plenty of caveats that prevent first-time buyers from benefitting.

What is first-time buyer stamp duty exemption?

As of 22 September 2022, first-time buyers in England and Northern Ireland are exempt from paying the duty on properties purchased up to a value of £425,000. This means first-time buyers can save up to £8,750.

If your new home is worth £425,001 to £625,000 you’ll pay 5% stamp duty, but only on the value above £425,000. For example, if you were paying £500,000 for your first home you would have a £3,750 stamp duty tax bill. That is 5% of the £75,000 above the £425,000 relief cut-off.

It’s worth noting that stamp duty is set to change again in April 2025 according to the government’s autumn 2022 budget.

Who qualifies for first-time buyer stamp duty exemption?

To qualify as a first-time buyer you must never have owned or had an interest in a residential property in the UK or overseas. This includes both freehold and leasehold property. This sounds simple enough, but the rules are strict and there are some potential surprises.

For example, things can get complicated when people are purchasing a property together. I see many people assume that as one party is a first-time buyer they will automatically qualify, but this is not the case if one of the parties purchasing the property has ever owned another property or part of one in the past.

It is of course possible to not put the name of the person who is not eligible for the first-time buyer relief on the deeds, but this raises issues of ownership. If your name is not on the deeds you may struggle to have a claim over the ownership of that property.

Another issue is if you have inherited part or all of a property in the past. If you inherit a property you are no longer eligible for the first-time buyer exemption, despite never actually having purchased a property.

This is a particular issue with people who are not from the UK as there are different inheritance laws abroad and in some countries, people automatically receive a percentage of a property if a relative dies.  I have had clients who have not even visited a property that they had a stake in.

In the past, some clients have assumed that as they have only bought an investment property they would still be considered first-time buyers. This is not the case. People argue that they are buying their first home, but the rules are strict and are for ownership of any property for any purpose.

The first-time buyer exemption also sometimes becomes an issue if the bank of mum and dad is involved in helping with the deposit for a purchase. Sometimes parents say they don’t want to gift the money to their child and want to have a stake in the property. When this happens it means that their child is no longer eligible for the exemption.

What should first-time buyers do?

There have been a few occasions where I have had to give a client the bad news that they are not eligible for the first-time buyer exemption as they aren’t first-time buyers in the eyes of the taxman. This can come as a rude awakening to clients, with some deals even collapsing as a result.

The main thing that people should do is get legal advice early and don’t just assume that they are first-time buyers. If you get advice you will be going into your purchase with your eyes wide open.

Nobody wants to hear that they are going to have to find up to £8,750 extra, but this can be a reality.

Early advice will give you the chance to assess your options and will help you avoid a potentially nasty and expensive surprise down the road.

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