Implications of 2nd house???

Praying4AMiracle

Hi all,
This is my 1st post and I don't know if this is the right place to put this, sorry if it's wrong. Hope some of you can advise me please with the following.....
............ brother in big bother financially (a long story I won't go into, some his own fault/some unavoidable) at present owns a 2 bed house (but he has no hope of buying a property in the future)
...........after looking at all options of helping him out the only option which seems agreeable to all is that myself/wife & my parents buy his house from him giving him money to clear debts & us an investment (he cannot keep up payments on house and would be unable to pay us back if we bailed him out ...which we have done numerous times)
............we let him live there for approx 5 - 8 years for no rent so he doesnt get into money probs again. (He has 2 young kids resident with him & 3 from previous marriage for whom he pays through csa & has very low paid job, his present wife does not work.)
...........he stays responsible for household bills but we would pay buildings insurance & for new windows/guttering which need doing along with any other external jobs that crop up over next few years
............we are assuming at end of 5-8 yrs they should qualify for housing association 3 bed house (he has 2 kids 1 boy 1 girl currently sharing 2nd bedroom aged 1 & 2) not sure when he would gain the extra points or whatever they deal in to get property (guessing when eldest child around 8-10 yrs)hence the loose time scale of 5-8 years (we are all ok about a loose time scale..no rush to sell house)
...........around this time his csa payments will cease as children from 1st marriage will be out of education so he will have more income so be ok with rent payments (we hope)

We have all discussed this and the plan seems a good idea to us all. Are we missing any blatant pitfalls? Also how will owning a 2nd property affect us? Are we liable for any tax payments or are there any financial implications when it comes to us selling the house in the future?
Also we were not planning a formal sale/purchase of house, just us paying off his mortgage & debts and him signing it over to us. Is this ok legally/financially?

This is all in the early stages of discussion so would be very very grateful for any input however small. Just a little worried that we may be going in blind so to speak and end up having to pay out unexpectedly. We will have to borrow to do this so could do without any extras to pay.

If we don't help he will lose the house by repossession so we have to step in.

Help! Anyone! Anything!!!! :cool:

itsakidsworld

Ok, I will try to breakdown some basic points and then hopefully when you have other posts, you can piece together a picture which will help you.

The first step is to agree a price with your brother for the house. However, if this is way below current market value, the inland revenue will want to know why the house has been sold so cheap. Especially as it is going back into the family, they could look at it as tax evasion and so implement what they consider a current market value. However, with good legal advice this can be avoided. You will need to apply for a new mortgage, either with current lender or a new company as all personal situations are different. Doing this with your parents will create a seperate issue for the mortgage company. You will have to probably set up a small company name for legal reasons and for tax reasons. Maybe look at doing it yourselfs first with parents offering a deposit?

You say you will be borrowing on the property so I presume it will be a mortgage? The lender will want a first legal charge over the property and the amount borrowed will be set against your income and possible rental income ( which you say will be nothing which will not help you secure a loan). If your brother is on such a low income and he rents from you or anyone, he will be entitled to housing benefit and other entitlements so that avenue should be explored. The housing benefit will be for you the landlord and so should not affect your brothers situation. This will be good for you to satisy any lender as you can show possible income.

When you have a buy to let mortgage which this will effectively be and the mortgage is a capital and interest ( which means the interest is against the loan and the capital is to what you reduce the amount by each month), you are liable for tax on any capital paid. This is offset against expenses for repairs to the property. However, certain repairs are not recoverable until the property is sold as these are classed as improving the value against repairing the house. Things such as double glazed windows if current windows are single glazed, central heating if it does not have any, etc. General running repairs are set against tax and classed as current expenditure, such as roof repairs, plumbing leaks, windows broke, painting, etc.

A good accountant will be able to offer correct advice on this and if done correct can be good for all concerned here. There are numerous other issues but for now that will do.

IAKW

lynzpower

My thoughts are

1) I did read that some BTLs you cant rent to family, although I did read that on here may have had the wrong end of the stick - look into it
2) that at the end of the time hes leaving, I suspect you may have to formally evict him, which will cost money. I say this as many Housing associations only take nominations from housing depts, and he wouldnt get anything as he si technically not homeless until he is evicted. Again look into this. there are some regs about "homeless at home" which I know of, but not a great deal do look into this, and take advice from Shelter who are excellent at the legals, along with your solicitor. Im sure someone will be able to tell you how much "evicting your tenant" will cost. Anyone?
3) have you had the property valued by 3 EAs? Make sure you are not paying over the odds for it.
4) are there any secured loans on the property, if there are what are the early redemption fees on them - some are horrendous eg 15k for settling early. Will your payment REALLY cover them clearing thier debts.
5) can you be sure you can afford to pay out over the long term, what rent will you be charging them?

All the best
Lynz

Praying4AMiracle

Thank you for your replies. I 'm sorry I should have been clearer in my post but I felt I was waffling on too much!
So here goes...
...We won't be getting a mortgage on the house, it will be a cash purchase. My parent's have their share and we have the majority of the money for our share but are now in process of getting a loan of £10,000 to make up the rest. The loan won't be against the house, we have excellent credit rating so loan shouldn't be a problem. We are putting it down as home improvements...is that wrong?
...We will be paying a much reduced price for the property, basically paying off his mortgage not the true value of the property (he's had mortgage for 6 years) but will be giving him money on sale of the house in the future so as not to be ripping him off. We could not afford to buy the house at current market value...no way! We thought he could just sign the house over to us so it not being a sale as such.....are we being naive?
...We won't charge him rent...he doesn't get housing benefit but would this change if he's not a home owner? I don't understand the benefits system at all.
...There are no loans secured on the property.

Am trying to arrange appointment with solicitor to get advice but would be really grateful if anyone can point out any difficult areas so I can bring them up with solicitor.

My head is spinning! Help !

Just a thought...my brother owes my parents £55,000 (they got him out of bother in past) which they have an I owe you document with solicitor to prove. (They never intend to claim this back from him but were using it as scare tactics at the time to try to stop him spending & have it in there will that when they die the debt is cancelled) Could this be used in any way to maybe skirt around any tax issues???

lynzpower

Oh much clearer

If oyu are happy not to be charging him rent, then cant see it being a problem, he doesnt have to pay or claim.

If you are paying cash for the property, then again, cant see it being a problem, are you effectively paying off his mortgage for him then adn then signing over the deeds to you. Seems striaghtforward enough, I cant see any pitfalls with this, but its not something I have much knowledge of.

I expect you will be liable for capital gains tax when you come to sell.

Lying on loan apps is pretty frowned upon, and i bleieve illegal. Could you not get a mortgage for 3 years or whatever loan terms are instead?

You may find you will have earlyt redemptoin penalties to pay on his mortgage product, this can be ££££s so do have a look at that.

HTH
Lynz
x

Praying4AMiracle

Thanks Lynz
Yes, our plan is to pay off his mortgage and he then signs the property over to us. Would we be liable for any tax this way?
We thought about adding the £10,000 to our mortgage as our mortgage is only a small % of our property value but the loan actually works out cheaper and with no early redemption penalties. We put home improvements purely because it was simpler than explaining the real reason and we don't want to use the new property as security for the loan. Still realise this is not right .....the application has gone in though.
Would CGT be payable on profit made on value of property when signed over to us or the amount we paid off his mortgage? There's a big difference between the two.
Am in the process of getting a redemption figure for mortgage so should know the cost shortly. I am expecting no redemption penalties (fingers crossed) as his mortgage is one for people with ccj's so I'm sure the last thing they would expect is for him to pay it off if you know what I mean!
Solicitor is on holiday so can't get to see him for 3 weeks unfortunately so it's hold fire at the minute.

lynzpower

I dont really know much about CGT, but what I think is that its paid to the government when you sell a home that isnt your primary residence. So it will be the market value when you come to sell. If you are buying under MV now, then I can see why this would be a fair amount, but I really dont know enough about it to be able to offer advice really..

You might be surprised about his mortgage. those ones for those with CCjs etc- could it be the ocean finances of this world and other lenders of dubious nature that slam on massive penalties. Yes, they wont expect him to pay if off early, they want him to drag it out ( giving them money) till the biter end. If something fortuitous comes along, they still want a massive slice. Howeve,r maybe im being a bit pre-emptive. I have them crossed for you there isnt any penalties.

You have a good 3 weeks to ask about though, so the delay will be to your advantage. No point in rushing things before you have the figures in front of you.

Praying4AMiracle

Thanks again Lynz

Beginning to think you could be right about his mortgage (It's with Bristol & West) I'm sure they will want to squeeze every last penny but I live in hope! In the meantime I'm going to use the 3 weeks waiting on the solicitor to my advantage as you point out and try to get as much info as I can.

Praying4AMiracle

Means as the biggest area of doubt seems to be tax implications (Ithink!) I am going to ask the board guide if they could move my post to the Cutting Tax board. Thanks for your input.

lynzpower

No problem, wishing you all the best with it

Ian_W

I agree with lyn about the possibility of penalties with a mortgage for those with CCJs, it is quite likely but not inevitable so all you can do is see what the redemption statement says or find out from your brother. He should know if there is a tie-in period.
Whatever price you buy it for if the market value is over £125K then I'm fairly sure that you will have to pay stamp duty on the transfer. I'm not an expert and your solicitor will advise but where property changes hands for less than the MV, particularly between relatives, I think the IR are very sensitive to the fact that money may change hands "under the table" as it were, so you're taxed as if MV had been paid whether it has or not.
When you do come to eventually sell you will have a potential CGT liability between the purchase and sale price. There are quite a number of reliefs you can claim, like taper relief which allows a % of the profit to be discounted the longer you own. Each of you will also have a CGT personal allowance which is currently £8,800 each so 4 of you buying will mitigate any liability so make sure you're all on the deeds. Also remember CGT is only payable on the profit and is at your normal tax rate so is only 40% for a higher rate tax payer, although it could push you into HR if it was big enough.
Like lyn I also think that borrowing for "home improvements" is more than a bit dodgy. Why? If you state that it's to buy a second property jointly with your parents I can't see it being more likely to be declined by the lender than home improvements. If it's additional borrowing on your mortgage I would be very concerned about trying to pull a fast one on your lender. It would be seen as mortgage fraud.
BoL.