Beware the gift of negative equity

04 July 2023

As inflation continues to drive up the cost of living, many prospective first-time buyers may be wondering how they will save up enough funds for a deposit. For those who are not higher earners, the only realistic prospect of achieving this in the short term may be the receipt of a gift or inheritance from a family member. 

Indeed, statistics suggest it is getting harder to reach the first rung of the property ladder. The latest English Housing Survey by the Department for Levelling Up, Housing and Communities shows that in the year to 31 March 2022, there were around 852,000 first-time buyers in England. That is 100,000 fewer than the year before and the average age of a first-time buyer in England is now 34 years old.

The use of an inheritance to help fund the purchase of a property for the first time is not a new phenomenon but it is becoming more important. Whilst most first-time buyers use savings, 8% relied on an inheritance to fund their first property acquisition in the year to 31 March 2022. However, as the economic skies grow darker, inheriting a property may not be as welcome as it once was and could come with an unwelcome tax consequence.

In particular, inheriting an interest in a property could result in additional tax being paid upfront on the acquisition of a first home. In England and Northern Ireland, taxpayers can benefit from ‘first time buyers’ relief’ for stamp duty land tax (SDLT) purposes, which can currently result in an SDLT saving of up to £8,750. A similar, but less generous, relief applies in Scotland for its land and buildings transaction tax but there is no equivalent relief in Wales in respect of its land transaction tax.  

Focusing on SDLT for simplicity and its first time buyers’ relief, a key criterion is that the purchaser must not have previously owned a residential property. In broad terms, this means the individual must not have acquired an interest in a freehold, or a leasehold property with more than 21 years remaining, or an equivalent interest in land anywhere in the world. HMRC is known to consider the inheritance of such a property to prevent first-time buyers’ relief being available. 

That might seem a fair outcome to many as the individual has ultimately received a property. However, considering the potential economic difficulties ahead, we could see many more people falling into negative equity on their mortgages or having released all the equity on their property to help make ends meet.

It’s therefore possible that beneficiaries of an estate could inherit a property, nullifying the availability of first-time buyers’ relief, but not actually receive any significant value personally. The banks or lenders may be repaid on the subsequent sale of the property with the beneficiary counting the cost of lost tax relief.  

One way to potentially mitigate the impact of this may be for the executors of the estate to sell the property themselves, rather than transferring the property to the beneficiaries of the estate. This would need to be considered by the professional advisers assisting with the estate. Ultimately, the key for first-time buyers is to be more wary of inheriting a home as it could come at an unexpected cost.