Buy house from parents?

typeractive

Hi MSE’rs

I need some help, here's a summary of the current situation:

• Parents own 2 homes.
• 1 house is family home (I still live here), other house rented to my sister.
• Family home has mortgage left on it, 2nd house is mortgage free.
• Can my folks sell the 2nd house to my sister for a discounted (cheap sum) and then use that money to pay their own mortgage / have a better quality of life.

How can this be done to avoid taxes etc? Something must be possible.


I just wrote a MASSIVE post with all the details of the scenario - how's and why's. Though I think it would bore the hell out you all. The main reason I want to investigate this is due to the fact my parents are killing themselves through the amount of work they do - I can't stand by and watch it happen. I want to free up some money for their mortgage and a few luxuires that they deserve. It will also help my sister understand money, and commitments. As for myself - I intend to buy my own place - all I want is more time with my folks and for them to have a life rather than work so hard.


Cheers for any help!

00ec25

Observations
a) your parents can sell the 2nd home for whatever discounted sum they want
b) I assume you sister can get a mortgage for the sort of value you envisage

Tax
- have you parents ever lived in the 2nd house as their principal home at all since they biought it, or has it always been just a 2nd home?

your parents will HAVE to pay Capital Gains Tax when they sell the 2nd home, how much depends on your answer to the above question. As a minimum they will be able to reduce the tax bill a bit by offsetting the gain by lettings relief - this will be a calculation specific to their circumstances

your sister will have to pay Stamp Duty based NOT on the amount she pays your parents, but on its full open market value (this is becuase it is being sold at a discount to a family member)

typeractive

00ec25 wrote: »

Observations
a) your parents can sell the 2nd home for whatever discounted sum they want
b) I assume you sister can get a mortgage for the sort of value you envisage

That's the plan - hopefully she can. I wouldn't really know the value of the property - perhaps £90k...maybe less given the market. I don't quite know how much my parents need to pay off yet either - would need to work out a fair and realistic value (for my sis to be able to cope with).

Tax
- have you parents ever lived in the 2nd house as their principal home at all since they biought it, or has it always been just a 2nd home?

Never lived in it. The bought it for my great aunt to live in (so she could be close to look after), when she died they rented it out, then they continued to rent it to my sister.

your parents will HAVE to pay Capital Gains Tax when they sell the 2nd home, how much depends on your answer to the above question. As a minimum they will be able to reduce the tax bill a bit by offsetting the gain by lettings relief - this will be a calculation specific to their circumstances

.your sister will have to pay Stamp Duty based NOT on the amount she pays your parents, but on its full open market value (this is becuase it is being sold at a discount to a family member)

Ok...I will need to get my head around all this bit and read it a few more times I think. Thank you very much for the start of my research. Have you by any chance done this yourself?

CLAPTON

if your parents have never lived there then the situation is based on the gain in value


so lets say its now worth 90k

it was bought for 50k

so gain is 40k (buying selling costs can be deducted too which can reduce it a bit)

then one has a CGT allowance of 10,100

if its jointly owned by your parents then
gain for each person is 20k
less cgt allowance of 10100 so
net taxable gain is 9, 900 at 18% so tax each of £1,782

a. if the values are different then you can do a similar calculation

b. if they are not joint owners then it may be worth changing the ownership before the sale.

Stamp duty won't be a problem if it's only worth 90k

typeractive

Thanks Clapton!!

Could you help with a couple of points? Where do you get the figure of £10,100 from?

I understand the difference between the price paid, and the value now. That will then be split in half for my parents. Though I am a little confused to the figure of £10,100?

Just to help within my parents situation;
Bought for: £18,500 (yeah - cheap I know! )
Worth today: £85,000 (just our estimates).

So that would be a difference of: £66,500.
Meaning gain per person is: £33,250

Perhaps the CGTA is £10,100 as a standard figure (entitlement?)

Meaning my parents would be each taxed 18% of £23,150 = £4,167?

:eek: That's over £8,000 in total!! :eek:

Is my understanding correct? That's a lot of money my folks would have to pay out. (hopefully I'm wrong :rotfl:)

Are there alternatives? Can my sister buy a share of the house or something? Would that at all be possible?

00ec25

typeractive wrote: »

Meaning my parents would be each taxed 18% of £23,150 = £4,167?

your maths is correct, assuming they own it 50/50

everyone is entitled to make a certain amount of capital gain each tax year (april - april) free of any CGT. This is the annual exemption figure, for tax year 09/10 that is £10,100 per person, it may increase next tax year (or not once the next Govt actually sets a budget)

you will of course incur some costs when you sell, these can be deducted from the selling price (£85k) before you work out the final gain, that will reduce it by a bit more, eg solicitors costs

as they have not lived in then lettings relief is unfortunately not available

in your case if your sister needs a mortgage then selling a share will be nearly impossible as no lender will fund a property which is partly owned by someone else.
If your sister has money of her own then of course there is nothing stopping her giving your parents a lump sum and in exchange "buying" a share - but you would need proper legal advice on how to do that

(please do not take this the wrong way, but they have been declaring the rent from your sister on their Income Tax returns haven't they?)

typeractive wrote: »

:eek: That's over £8,000 in total!! :eek:

don't lose sight of the fact they will still have over £55,000 coming to them

typeractive

00ec25 wrote: »

your maths is correct, assuming they own it 50/50

everyone is entitled to make a certain amount of capital gain each tax year (april - april) free of any CGT. This is the annual exemption figure, for tax year 09/10 that is £10,100 per person, it may increase next tax year (or not once the next Govt actually sets a budget)

you will of course incur some costs when you sell, these can be deducted from the selling price (£85k) before you work out the final gain, that will reduce it by a bit more, eg solicitors costs

as they have not lived in then lettings relief is unfortunately not available

in your case if your sister needs a mortgage then selling a share will be nearly impossible as no lender will fund a property which is partly owned by someone else.
If your sister has money of her own then of course there is nothing stopping her giving your parents a lump sum and in exchange "buying" a share - but you would need proper legal advice on how to do that

(please do not take this the wrong way, but they have been declaring the rent from your sister on their Income Tax returns haven't they?)



don't lose sight of the fact they will still have over £55,000 coming to them

Thanks for that. I would have thought my parents are doing it by the book - they're straight up, hard working people. (i'd still need to ask of course - I'd imagine they're in trouble if they ain't been doing all that?) pretty sure my sis is all marked up as being official living there etc - council taxes and post etc etc

As for the money - they wouldn't be getting all that £55k. The idea would be to sell for say £30 / £40k. Just enough to help pay off their current mortgage & have a few treats that they deserve - little holiday etc (thy never get to go anywhere, which really saddens me as they both have aspirations to go to places!). I'm not sure it's worth the 'hassles' of them selling the property to my sister for say £30k to incurr approx £8k's worth of tax! hmm

Cheers again

typeractive

Ahhhhhhh right - now a' gets ya!

Well that all sounds much better!! :j:j:j

Now what I need to do is check ma sis can get a mortgage sorted (and stick to it), and see if ma folks would be willing to do it. They aim to leave both me and my sis a house when they are gone, though they are working sooooo hard it's unreal (seriously, it's wrong for people to work so hard at this stage of their life). My sis would gain some independence (in terms of finances and commitment), and my mum and dad could cut back on work hours, and spend more time with each other.

Thanks very much indeed - I'm sure I will still have more questions!!
:beer:

CLAPTON

00ec25 wrote: »

not quite, remember the gain is the difference between what your sister pays and your £18,500 original cost, not what the house is "worth"

so the maximum price sis could pay for it with your parents paying no CGT at all (based on 50/50 ownership) is:
£18,500 + dad's exemption 10,100 + mum's exemption 10,100 = £38,700 (+ any deductable costs, say a few £100 for legal fees)
eg sis pays £40,000, your parents pay total tax of £234. Not much tax for the hassle?

sadly NO, this is NOT correct.

the HMRC will expect the property to be valued at a realistic market price and the actual sale price (especially to a relative) is irrelevant. In fact if they gave the property for nothing CGT would still be payable.

Sorry but that's how it is.

alm721

CLAPTON wrote: »

sadly NO, this is NOT correct.

the HMRC will expect the property to be valued at a realistic market price and the actual sale price (especially to a relative) is irrelevant. In fact if they gave the property for nothing CGT would still be payable.

Sorry but that's how it is.

This is also my understanding

typeractive

CLAPTON wrote: »

sadly NO, this is NOT correct.

the HMRC will expect the property to be valued at a realistic market price and the actual sale price (especially to a relative) is irrelevant. In fact if they gave the property for nothing CGT would still be payable.

Sorry but that's how it is.

There's always a downside ain't there?

...I didn't really want to say thanks for the bad news lol - though it's helpful.

So do you know how to work out what figures we would be looking at in terms of taxes, as based in my example a bit further up?

Cheers