Implications of 2nd house???

bikerqueen

is there anything to stop him running up a huge number of debts again and you guys having to bail him out, again?

itsakidsworld

Hello again,

Sorry for the late reply today but I have just returned home and read the updates on your situation.

It should not be a problem at all really with what you are trying to do, but obviously a couple of points need working on.

The Bristol & West mortgage needs looking at. Before you approach the solicitor can you either get hold of your brothers mortgage details and read the penalty clauses which will be in it. Or if he is willing, ask him to contact them and ask for a redemption value for say the end of June or mid July.

The extra loan on your own property is no big deal but maybe a little more honesty might have been better. But if your own mortgage is low why not just tell them its for a holiday or something. I don't see the point in giving them massive information which will not help you. At the end of the day its only a problem if you decide not to pay it back.

The Inland Revenue is a big thing for me. Sorry, but it is an area which I have had to use in business so it needs careful consideration. Especially as it is selling within the family. What do you think the current value is and what is the price you are paying? You will need to employ a very good accountant to help you here and again, remember that tax avoidance is ok, tax evasion is fraud. If the IR think the property has been sold at a crazy low price they can instruct valuers to assess the property and area and they will work on this figure. Its not impossible to achieve a result here but you may need the services of a very good accountant who will have to write to the IR and explain why the house has been purchased so cheap. It will be money well spent, believe me.

But proceed as you want and I feel sure you will obtain the result you all require at what is probably a difficult time for you all.

The very best of luck

IAKW

Ian_W

IAKW posted: but maybe a little more honesty might have been better. But if your own mortgage is low why not just tell them its for a holiday or something.

Surely a contradiction in terms?

But why, on a regulated financial product like a mortgage, would a lender think a short term consumer product like a holiday was a better bet to lend on than the purchase of a second property? People borrow all the time, secured against their homes, for BTLs or holiday homes without any problems, why make up fairy stories that potentially could cause you quite serious problems if discovered?

Praying4AMiracle

Hi all,
Thanks so much for the replies, you've all given me plenty to think about.
... Firstly I'm feeling bad about lying on the loan application, so as they are due to ring me tommorow to confirm details I think I will tell them the true reason. Not brave enough to admit to lying so will maybe say it's a change of plan. Do you think that's ok?
...I am seeing my brother also tomorrow so will push him to find out mortgage details (I've been waiting for him to get back to me) he has no idea of details so needs to search for mortgage papers. He's not very organised to say the least so God only knows when they'll turn up!
...Brother has produced a recent mortgage statement though, he owes around £26,000, current market value is £85-£95,000 looking on the bright side (the house is a little run down but nothing too costly to put right) but with the mortgage statement at least we have all the details for him to request a redemption figure so I'll get onto that too.
... Regarding CGT ....I have little knowledge other than you guys have provided. If myself and wife, and my parents are all listed on deeds as co-owners do we each qualify for CGT personal allowance or is it one allowance per married couple?
...Bikerqueen, this is our plan to stop the house eventually being repossessed (he has not missed a mortgage payment over the 6 years but this is purely down to our intervention) As I've mentioned we plan to clear his debts, set him up when the house is sold when he (fingers crossed) gets a housing association or equivalent place by funding new furniture and a new car so he has everything he needs and a clean slate along with a chunk of money. This is a last ditch attempt and we have all gathered to discuss this at length and are all agreed that he is then on his own....no more bailing out. We can only hope that it works.
...I also need to do more research into the points systems for housing associations or the like , i've never dealt with any so don't know the proceedure. I recognise we may have to "evict" him so he qualifies for housing in the future which opens a whole new can of worms! Would be grateful if anyone has any experience in this area.

Off to bed now. Thanks again to you all, your knowledge and opinions are much appreciated. :beer:

MarkyMarkD

The capital gain is calculated on the difference between the price you (eventually) sell the property for, and the price you paid.

The price you paid is the sum of any cash you hand over and any debt you discharge on his behalf, plus any legal fees etc. incurred in the transaction.

I agree with Ian W that I can't see why you considered it sensible to lie about the reason for the loan - your reason for the loan is entirely reasonable and legitimate and wouldn't be a cause for concern for the lender.

If you aren't charging any rent, I don't think that you have technically entered into a letting business. As there's no income, there's no income tax due. And conversely, you can't offset any expenses.

But CGT will still be due when you come to sell. For this reason structuring the purchase as a joint one between 4 parties is a very good idea as it means you get 4 CGT allowances when you sell.

itsakidsworld

Fair comments Ian W regarding loan application but I was trying to point out that with the existing mortgage low, it would not be a problem raising funds this way. However, as with all applications, the forms always ask why you require the cash. Like I posted not a lie but a little thought perhaps. But no worries, point taken and lets not dwell on this as this is obviously a minor point in sorting this problem out.

Back to the property, forget about the question of capital gains tax as this is a seperate issue. But the fact that the house will be bought for around £26,000 and it is worth in the £90,000's is a problem which you will have to address. I posted about speaking to a good accountant and after you have pointed out the price, this is even more vital now. Without a doubt you will have to answer questions regarding why you have purchased at a low price and so better to sort prior to purchase. Also ask the accountant about the purchase being a "business" as it is a second home and business venture, regardess of income or not.

If you do not have an accountant then ask locally for someone who can recommend one and make an appointment to see them. The cost will be worth it once this purchase has been completed.

jamesr_4

The tax issue is actually to get the correct advice so that you are not paying too much tax. If your brother was to sell the house for market value, then he would not pay any capital gains tax on gains to date as the property is his principle private residence.

If you do come to purchase the property for 25k instead of its 90k MV, then that is 65k of value that potentially becomes taxable when it wouldn't have been in the case of a normal sale arrangement as you would be selling it as your second property and will only have a base cost of the 25k

Gorgeous_George

I don't like this at all.

I'd recommend your parents buying the house from him at, say, £90K. This gives him £74K to repay your parents (£55K interest free loan) and any other outstanding debts.

Your parents then rent him the house at market value which he can claim in housing benefit.

If your parents use a BTL mortgage at maximum LTV, this will offset their tax burden from the rental income.

This way, everyone knows where they are; family division will be avoided and your brother will have his self-respect.

Your parents may leave half the house to him and half to you in their will. This would mean his rent could be reduced by 50%. If his circumstances change he'll be able to buy the house again.

In the meantime, your parents could use some of the £55K to do the necessary repairs on the property. They may even gift him an allowance each month to cover some or all of the rent. Bailing him out is only worthwhile if there's a plan for him to raise his income to cover his spending in the future.

You could, of course, substitute your parents for you and your OH.





GG

gingercordial

If the property is only worth £95k then it is not subject to stamp duty. However please make sure that £95k is an up-to-date market value. If for any reason it has shot up in value then remember stamp tax is due on property sales (and yes, I think you do have to sell it properly, so add on some legal fees) over £125k. Seeing as it's in the family then they could apply market value to the transaction no matter what you actually pay your brother for it.

Your brother should not have to pay capital gains tax on selling it to you as it is his home (assuming it is his only home). However, it will not be your home and therefore you will have to pay capital gains tax on the sale. Yes, everyone who owns it gets their own personal allowance to use against their share of the gain. Since the gain is basically sale price minus purchase price (with some adjustments) if you buy it for only £20k then your eventual gain will be much bigger than if you buy it for £95k. But of course that's up to you seeing as you would have to borrow more now to finance the £95k.

I am concerned about letting it to a member of your close family for no rent, in case HMRC decide that he should have been paying you market rent and try to tax you as if you were receiving rent. That could mean you have an income tax bill even though you have not actually received any money. It would also mean you have to do a tax return (therefore more admin if you are not doing one already). The tax would be at 22%/40% depending on how much you earn - it would go on top of your earnings from your job and so could take you up to the 40% band if you are not there already. It might be better for you to just charge him rent in the first place! Please note I'm not sure about this at all, you'd need to take some proper advice.

If you do get a buy-to-let mortgage then there may be scope to claim the interest as an expense in working out your income tax, which would reduce the tax bill.

Also remember there are various legal responsibilities to being a landlord, not sure what these are but I think there are some around needing to check the safety of the property, gas systems etc. All this in addition to the eviction issues.

Finally, please think long and hard about whether your brother will be able to change, and will he agree to leave in 5-8 years, or whether this is going to be another expensive bail-out for you and your parents. After all, what's his incentive if he's living rent-free at your expense? Not trying to put your brother down of course.

I'm really not trying to put you off, I think it's great that you want to help your family. But hopefully you can see from the above that it's not all that simple. Please talk it through with an accountant/tax adviser/solicitor who knows your whole situation, or even call HMRC and ask their advice, they are usually very helpful!

cash99

For CGT purposes sales of assets between connected persons ( includes family memebers) are always at market value, regardless of the amount paid. As its your brothers Principal Private Residence the gain on his sale to you is exempt. Therefore you want the highest market value possible, which avoids stamp duty, as this will be your base cost when you eventually sell the property. i.e.. your gain will be whatever you sell it for less the mv when you bought it.

If you decided to let the property rent free HMRC have no say in this, whether or not it is let to a family member. They will not allow you a loss on the letting either.

Inheritance Tax also needs to be considered, as effectively your brother is gifting you the equity in the property. However given the amounts involved, it is unlikely that his estate will exceed the threshold.

If part of the equity is offset against the £55k owed to your parents, then there may be further IHT complications, if this is then given to you as a share of the house.

I would suggest that the equity is used to clear the £55k, and whatever other debts you brother has. You can then legitimately say that the equity has been used to repay debts, and not given away. You should then charge you brother rent, for which he can probably claim hosuing benefit, although I have no idea of the rules on this.