Time running out for first-time buyers to avoid Stamp Duty

First-time buyers have less than two months to get on the property ladder if they want to avoid paying Stamp Duty on their home.

Buying a home is about to get even more expensive for some first-time buyers.

Stamp Duty Land Tax (SDLT) is a tax on property and land purchases and can make a significant difference to the cost of house purchase. In an attempt to make life easier for first-time buyers, a Stamp Duty holiday of two years was announced back in the 2010 Budget.

However, the clock is ticking, with that holiday coming to an end on 24 March.

The holiday’s over

The idea was that the Stamp Duty holiday would help first-time buyers get on the property ladder. For years now it has become progressively more difficult for first-time buyers to access the property ladder, with property prices rocketing and lenders requiring ever larger deposits.

Some experts hoped the scheme would be extended beyond the March deadline, but in the Autumn statement last November George Osborne announced that the Stamp Duty holiday would end as planned.

After 24 March 2012 the rules will revert to normal, meaning anyone buying a property for more than £125,000 will have to pay Stamp Duty of at least 1%. Crucially the key date is the completion date, so those first-timers currently buying a property will to push to complete the deal by 24 March at the latest.

If you’ve yet to find a property to buy it will be difficult, although not impossible, to take advantage of the Stamp Duty holiday. In theory, property purchases can take just a few weeks but surveys, valuations and slow-moving solicitors mean most transactions take a couple of months.

That said, if you act quickly and chase up all of the players involved in the move, it can be done. lovemoney.com's editor John Fitzsimons went from having his offer accepted to completing in the space of two weeks! What's more, being able to act quickly may make you even more attractive as a buyer and allow you to negotiate the purchase price down!

Stamp Duty rates

The rate of Stamp Duty you pay depends on how much you spend buying the property. For property purchases between £125,001 and £250,000 you pay 1%, then 3% from £250,001 up to £500,000, 4% from £500,001 to £1m and then 5% for properties over £1m.

Unlike income tax, which is “tiered” with different rates kick in at different levels, Stamp Duty is a “slab” tax where you pay the rate on the whole purchase price of the property rather than just the amount above the threshold (as with income tax).

Because of this, Stamp Duty can distort the housing market. For example, a house priced at £250,000 would attract a tax of £2,500, but one of £250,001 would be liable for a £7,500 tax bill (3%). The result is that it can be very difficult to sell at prices just above each threshold.

How much will buyers have to pay?

First-time buyers buying a £250,000 property on or before 24 March will pay zero Stamp Duty, but those buying the same priced property from that date onwards will pay £2,500, an amount which will make a big difference to a property’s affordability.

The good news is that falling house prices mean that in many areas of the country it will be possible to buy a property for less than £125,000, at which the lowest rate kicks in.

What is a first-time buyer?

The Government defines a first time buyer as someone who has "not previously purchased an interest (in a property) or its equivalent anywhere in the world". So if you previously owned then sold to rent and are now getting back on the property ladder, you won’t be categorised as a first-time buyer.

If you’re buying a place with your partner and one of you has previously owned a property then unfortunately you’ll have to pay the tax too.

You also need to be buying a property as your main residence, so the exemption does not apply to investment properties. Finally, if you've inherited, but not bought, a property you will not be classed as a first-time buyer either.

Much like self-assessment tax returns, a buyer will declare whether or not they own another property but HMRC can investigate your affairs – so be warned.

Mortgages for first-time buyers

Mortgage deals for first-time buyers, especially those with small-ish deposits, have started to improve lately. However, meeting eligibility criteria and passing credit checks will still be an issue for many people.

Here’s a selection of the best buys on offer at the moment.

More: Cost of mortgage repayments falling | How to stand the best chance of getting a mortgage

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.