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Gifted equity deposit

Could someone please help me get my head around this as the mortgage broker tried to explain it a number of times but I still don't get it!

We want to buy the house we are currently living in off my dad. It's market value is £250k, and he wants to sell it to us for £190k. There is a current mortgage outstanding on it for £138k. The maximum we can borrow is £140k. I thought that we could use the £60k difference (ie. The equity) as our deposit. Meaning that with our mortgage we would have £200k. However the mortgage broker is saying that we could only afford it if my dad sold it to us for £140k.

I'm puzzled because the other option is that we take the £112k equity (minus costs and CGT) and physically move to another house. In which case we would have a total budget of say £230k for a new house. So why can't we buy this house for £190k?
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Comments

  • Forget about the market value. Your dad wants to sell you s house for £190k but you can only raise a mortgage for £140 so where is the extra £50k for your dad?

    The second scenario does not make sense as you only have £60k in equity.
  • LilElvis
    LilElvis Posts: 5,835
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    It's pretty simple. Your Dad wants £190 for the house (his mortgage doesn't matter) but you can only borrow £140 so you can't afford it.
  • To be clear,

    Which one of these is true?

    A) Your dad would like to clear his mortgage by essentially giving you the house as long as you take a mortgage to pay his off.

    B) your dad would like to sell you a house for £190k, you don’t have any extra cash so if you did this you would owe your dad £50k and don’t have any way to fund that.

    I suspect it’s the former- I.e. your dad is being very generous, and the £190k figure came up as what he would ‘declare’ for CGT purposes- presumably because this was what he bought it for and he figures he therefore wouldn’t attract any profit which is taxable.
    You would slip under the SDLT threshold at any one of the three figures mentioned (£138k, 190k or 250k).

    With respect to the mortgage company, i’m Fairly certain they would happily proceed with your mortgage if you needed to borrow £138k for a £190k or £250k house, however they would want to know where the rest of the money was coming from.

    I may be incorrect but I believe he can’t gift you that much (£112k) tax free. Equally, if he did ‘sell’ you his house for less than the market value, I’m not clear what view HMRC would take on that with respect to CGT. Basically, what you need is a tax advisor who can advise on what he can gift you, and what will happen with his CGT.

    Most importantly, do not work out your own clever scheme because HMRC will see straight through that and it will undoubtedly leave you both with a massive tax bill!
  • Cakeguts
    Cakeguts Posts: 7,627
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    jennyc85 wrote: »
    Could someone please help me get my head around this as the mortgage broker tried to explain it a number of times but I still don't get it!

    We want to buy the house we are currently living in off my dad. It's market value is £250k, and he wants to sell it to us for £190k. There is a current mortgage outstanding on it for £138k. The maximum we can borrow is £140k. I thought that we could use the £60k difference (ie. The equity) as our deposit. Meaning that with our mortgage we would have £200k. However the mortgage broker is saying that we could only afford it if my dad sold it to us for £140k.

    I'm puzzled because the other option is that we take the £112k equity (minus costs and CGT) and physically move to another house. In which case we would have a total budget of say £230k for a new house. So why can't we buy this house for £190k?

    You can't get equity out of a house unless you sell it. So if you bought your dad's house for £190k in that you paid your father £190k and then sold the house for £250k you would get the extra £60k equity.

    So you can only buy your father's house if he sell is to you for £140k because that is all you can afford to give your father.
  • Tom99
    Tom99 Posts: 5,371
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    If your father sell you the house at any price £140k £190k, he will still be treated as selling it at market value ie £250k because your are connected persons and the sale is not at arms length.

    https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14560
  • jennyc85
    jennyc85 Posts: 110 Forumite
    Ok thanks that makes sense now. I thought the equity was calculated on the market value that's why I was getting confused. Yes we're aware the CGT is calculated on market value. So it makes more sense to sell it to a stranger and physically move then as we will have a bigger deposit. The £190k figure came from the remaining mortgage, plus CGT, plus budget for renovation as I thought we could use all the equity in the house as our deposit but I was obviously mistaken.
  • jennyc85
    jennyc85 Posts: 110 Forumite
    "3. Inter-Family Sale & Gifted Equity

    Also known as a concessionary purchase.

    It could be that you!!!8217;ve offered to sell a property to your son or daughter at below current market value. With an inter-family sale, the equity in the property is treated as the deposit and no further funds are required.

    Nationwide, Halifax, Kent Reliance, NatWest, Santander, Coventry Building Society, Godiva Mortgages, Aldermore

    There are certain lenders who are willing to accept gifted equity from family members who are not the parents, e.g.an aunt or uncle.

    Certain lenders are comfortable with the stamp duty being based on the borrowing rather than the market value."

    This is the information I seem to have misunderstood.
  • jennyc85
    jennyc85 Posts: 110 Forumite
    But we also have the 'gifted equity deposit', which I thought was market value minus outstanding mortgage.. But am obviously getting confused. If we only have the £140k we can borrow then where is the gifted equity deposit?
  • Hi
    I went through this a few years ago. We lived in a house owned by my parents. We wanted to buy it off them it was worth £160k with a mortgage of £93k. We used Coventry Building Society as a family sale to pay the mortgage value and the remaining equity is essentially the deposit. No issues for us. You don't physically get the equity until you move though if you need that money. Parent had to sign indemnity policies to say they wouldn't claim the gift back in the event of bankruptcy etc.
    Hope that helps
  • Sea_Shell
    Sea_Shell Posts: 9,272
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    jennyc85 wrote: »
    We want to buy the house we are currently living in off my dad.

    Do you live with your Dad, or is this a second house he owns?
    How's it going, AKA, Nutwatch? - 12 month spends to date = 2.47% of current retirement "pot" (as at end February 2024)
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