Building a new home

fishfork

Hi,

My girlfriend and I are looking into building a property on part of her parents land. I was hoping that somebody could help me with some information in a couple of main areas relating to this.

- Contractual/Legal
- Tax

As a bit of background to this story...

My girlfriends parents have a plot of land adjacent to their property which has laid dormant for many years now. The land does have planning permission for a particular build; however, we are hoping to resubmit a different property for approval. As we are currently in the market to buy a property we all discussed the possibility of us paying for the build of the house, thus taking this share in the overall property, and her parents retaining the value of the land and profit. Basically, assuming an even split of 1/3 of the property value for land, build and profit, we would own 33% of the overall property and they would retain the remainder. Over time, we would eventually look to buy the remaining ownership from them in affordable chunks. This raises a few questions that I’d appreciate some help with:

1. If we were to build the house for us to live in, would they/us be liable for any form of tax at this point as they would have effectively sold 1/3 the property to us?
2. As we began to purchase a greater share in the property would this then mean that we would have to pay stamp duty (assuming the threshold was broken)?
a. For example, if we were to purchase an extra 20% of the property would we pay stamp duty at this point?
b. If we then purchased another 10% would we pay stamp duty again?
c. How would the stamp duty be calculated? Would we pay a percentage of the total cost based on the amount that is changing hands?
3. How would this work contractually? Would we work with a solicitor in the outset to draw up a contract stating that we will own 1/3 of the overall property once the build is complete?
4. If the property was sold whilst we still owned 1/3 of it would her parents be required to pay capital gains on their percentage of the sale price? I’m assuming that we would not be required as residents of the property, but please correct me if I’m wrong.

Thanks in advance for taking the time to reply to this and I would appreciate if anyone could also offer any advice/answers for anything else that we should be thinking about.

DVardysShadow

fishfork wrote: »

As we are currently in the market to buy a property we all discussed the possibility of us paying for the build of the house, thus taking this share in the overall property, and her parents retaining the value of the land and profit

Deal with the above first. If the parents retain the land and the profit, you personally could be severely ripped off here, if the relationship falls apart.

Whatever you do, you can split into whatever percentages you like, but every aspect - risk, land, bricks and mortar must be split according to the same baseline percentages.

twokcc

Just a suggestion
Wouldn't the simplest solution be to actually buy the land (at market value) and pay the stamp duty due on the purchase price. If its less than £175K then currently no stamp duty payable. No GCT for parents as selling part of there PPR. If you currently can't afford to pay they could give you a loan of up to 100% on agreed repayment terms.
Seems a lot simpler to me

Doozergirl

They would certainly be better off on the tax front by selling you the plot first as they would not incur CGT and you would not incur Stamp Duty, or would at a much lower rate.

And how is it fair that you build the house but they keep all the profit?? There is no circumstance under which they would ge to keep all the profit unless they paid for the build themselves. If they sold the plot to another couple to build on, they would only get the value of the land. It's outrageous that you build a house and they keep everything - especially considering this is their daughter!

I'd do something like allow them to sell the plot to your girlfriend and then when the house is built you divy it up then between the four of you. Are you going to need a mortgage? It gets dirty then - if you default on the mortgage and are repossessed then their share is diminished by that.

It's really complicated and probably a recipe for disaster as soon as you start considering the possibilities of what could go wrong. When you overspec the house in their view and they demand a larger share of the house because you spent too much on a fancy kitchen. nhow much is the house worth exactly? Which EA valuation do you go with and even at what point? The price when the house is built or the price when you're trying to buy the last 10% and prices have rocketed or whatever.

tek-monkey

As said, buy the land and build on it. If their reasoning is security for their daughter, get her to buy the land and enter into an agreement with her when building. Otherwise I'd leg it. I am assuming you can build for cash, as a mortgage would likely have problems with this arrangement.

Fire_Fox

Are the parents trying to protect their daughter's inheritance or do they need the money for the land for their retirement? I'd ask then to gift the land to your girlfriend, or possibly both of you, and have a formal agreement in place with how you and her divvy up the house if you split up.

Four people owning shares in a property is a recipe for disaster as if any one of you ends up in financial difficulty it affects the others. Mortage providers - and quite possibly anyone who'd loan you the money for the build - are unlikely touch you with this arrangement, imagine if you fell sick and couldn't work, failed to pay the loan for the build .... how can they repossess one third of a half-finished house?

fishfork

Thanks to all for taking the time to reply to this. It certainly does suggest we need to think about this a lot more. In answer to a few of the points raised though:

- The profit that they would be taking would be the profit at the point that the house was built. i.e. 100k plot, 100k build, 100k profit. They own 2/3 of the property.
- We can probably afford about 50% of the total build cost at the moment and the rest would need to be mortgaged. From comments made it sounds like this would be difficult.
- Her parents would still be hoping to use this build as a bit of a retirement fund so wanted to keep hold of a percentage of the overall build

tek-monkey

Just so I'm straight here, they want you to build a house on their property, which they retain 66% of? How does this actually help you? You seem to be doing all the legwork and taking the risks, only to live in your in-laws garden? They are effectively doubling the value of their land for absolutely no outlay, and have more rights to the property built than you do (who is paying for it).

I dunno, this just seems a bit weird to me. I'd rather go out and get a shared ownership place, as at least their isn't the added complication of family if things go wrong.

DVardysShadow

fishfork wrote: »

- The profit that they would be taking would be the profit at the point that the house was built. i.e. 100k plot, 100k build, 100k profit. They own 2/3 of the property.

Er No. The value of a building plot is the value of the house on it minus the costs of putting it there. The plot is not worth £100000 without planning permission, but it may be worth more with permission. In your position, I would flatly refuse to look at any analysis of the land value which included 'profit', because it means that they anticipate NOT taking a risk on this portion of the project. It goes against what I said about keeping the risks in the same proportion as the ownership.

Effectively the plot is being valued at £200000. They should just state this and you should choose to accept or not. Probably you need some assistance from a valuer.

fishfork

Sorry, I may not have given enough information in my original post.

They haven't asked us to build a property on their land, they have been thinking of building one for a while but getting the motivation to actually do it seems to be the difficult part! Affording to do it wouldn't be a problem for them at all.

We then approached them suggesting that as we were in the market for a property, it would do us both a favour for us to build on the property. They could quite easily build without us but it would be beneficial to us as we would be able to build the home we want, in the location we want and would also be able to build a home much better than we could afford otherwise.

The comments that you have all made do make sense though.

Fire_Fox

fishfork wrote: »

Sorry, I may not have given enough information in my original post.

They haven't asked us to build a property on their land, they have been thinking of building one for a while but getting the motivation to actually do it seems to be the difficult part! Affording to do it wouldn't be a problem for them at all.

We then approached them suggesting that as we were in the market for a property, it would do us both a favour for us to build on the property. They could quite easily build without us but it would be beneficial to us as we would be able to build the home we want, in the location we want and would also be able to build a home much better than we could afford otherwise.

The comments that you have all made do make sense though.

If the in-laws can afford to build the house and you clearly can't raise that kind of capital then perhaps they could retain the land, invest in the build but you and your girlfriends project manage? When it's complete, you raise a mortgage and buy the house, using the money you earned project managing as a deposit.

You would have to make a legal contract to be paid a fair rate for project management payable on completion, which you might somehow be able to take off the value of the finished article. You'd need a solicitor to draw up the agreement, but your in laws may be able to tax deduct your salary from their profits for capital gains tax. I think you would still have to pay stamp duty, if applicable.

Please note I am no legal buff, so this will need refining: you certainly can't get paid a silly rate for project managing to evade tax altogether. Project managing is a MAJOR undertaking if you watch any of the Grand Designs shows, I can't see why a family member can't be paid a wage for it.