Buying family from property with gift of equity

Miss_Tigs

Morning all,

My fiance and I are in the process of buying my father's house from him. We have accepted an offer on my flat and will be using the equity from the sale, together with a new mortgage, to buy the house. My dad is mortgage free and will be living elsewhere after the purchase.

The house is worth £300k and we will be raising £250k as described above. We are declaring the full £300k as the purchase price and paying required stamp duty etc. The remaining £50k will be a gift from my father and our mortgage lender is happy with this.

However, three queries:

1) We are not married yet, so our solicitor has suggested a Declaration of Trust between myself and my fiance, to reflect the fact that I/my family are contributing more towards the purchase. I am fully committed to our relationship and would be happy to split the ownership 50:50, but wonder if I am being naive here? Particularly as some of the money is coming from my family, rather than directly from myself (see 3 below).

2) If we did draw up a Declaration of Trust, would this be upheld after we married? Or would the house automatically be classed as a matriomonial asset, if we were to divorce? Are there any other benefits/disadvantages to being tenants in common when you are married? (We would naturally draw up appropriate Wills regarding our shares, to ensure we each inherited the property from each other)

3) In addition, my father has now mentioned that he would like to protect the 50k he is giving us, so that it would come to me if we separated, or to any children we may have if I died and my fiance remarried. Is there any simple way to do this? I assume in this situation we couldn't own as joint tenants? Also, would such a proviso leave my fiance/husband in difficulty if I did die? I obviously wouldn't want him to have to sell the house or anything.

Incidentally, if I die without children, then my father doesn't want the money back - I don't have any siblings and he has said he wouldn't want the money back in those circumstances. It is more about protecting me if we divorce, or any future children if I die and my fiance/husband remarries.

This was supposed to be a quick, straightforward sale with no chain.... I guess nothing is that simple when family are involved!

Thoughts appreciated!

BitterAndTwisted

If you spend a little time on this forum you will read of dozens of threads about couples who buy together with unequal shares and the misery which ensues once the relationship breaks down. Please pay attention to the very good advice your solicitor is offering you!

Miss_Tigs

Thanks B&T! Obviously the decision re joint tenants/ tenants in common is one that I won't be taking lightly.....

However, I'm not entirely clear whether things such as Declarations of Trust are actually taking into much consideration in divorce courts, or whether there are any unforeseen difficulties that may arise from being married and not owning as joint tenants (with regard to how we inherit the property from each other etc)

I previously owned a flat with a friend on a tenants in common, as that obviously made sense in those circumstances. I'm just not sure how a similar arrangement would be viewed when we become a married couple.

CLAPTON

there is no simple answer to your question

you need to work through all the scenerious and determine what you want
i.e. separate/divorce with and without children
if the house is worth more and if it is worth less

death of either part with and without children

e.g. if sadly you died with children would you want your husband to have to raise 50k to give to your father or even sell the house; although it this case maybe life insurance is the answer

in any case if you are buying a house together you need a will now

Miss_Tigs

Thanks Clapton. You are quite right - we need to sit down and go through the various scenarios (were trying to do this last night, but at too late an hour I fear!)

We are definitely planning to make Wills now that we are buying property together and will be arranging joint life assurance to ensure that the mortgage is paid off if either of us dies.

With regard to my husband having to raise 50K if I died, this is something that I would wish to avoid. I presume that, as father of any children we may have, he would act as guardian to any money that was left to them anyway, until they were of age? Or perhaps my father would need to specify that the money could remain with my husband until such time as he chose to remarry, or if he died?

I would obviously not wish this proviso to prevent my husband from taking appropriate financial decisions for my surviving family as a whole! For example, he may need access to the 50K due to an unforeseen change in circumstances, such as a health issue or something.

Richard_Webster

I would have told the lender the property was worth £300K but you were buying from father for £250K and would they give you an 83.33% LTV mortgage on it. If they were happy the property was actually worth that then you would be able quite legitimately to say that you had bought the property for £250K and only pay £2,500 SDLT!

SDLT is only payable on the actual consideration so if the house was gifted to you its value is irrelevant there wouldn't be any SDLT - but other taxes could be applicable.

OK not all lenders work that way, but in principle there is no reason that they can't be asked. Saying it is a gifted deposit to me is a complication that you should try to avoid.

TrickyDicky101

Yes, if you're so prepared to pay unnecessary tax to HMRC then would you mind paying my stamp duty as well as my income tax due this year? It would help me out immensely. Ta.

Miss_Tigs

Thanks Richard,

We did original think that we would do that...... However, our solicitor and mortgage lender both advised that, because we are connected parties (related), the sale would be deemed as taking place at market value, regardless of monies actually paid. The gift of equity portion would be treated as Potentially Exempt Transfer for inheritance tax purposes.

Also, we got a much better interest rate due to having a higher LTV.

TrickyDicky101

It's a shame you didn't read the HMRC guidance on Stamp Duty because there you would find you didn't have to pay Stamp on £300k, just on £250k. Sounds very much like negligent advice to me by your solicitor.

Relevant HMRC guidance is here, I believe:

http://www.hmrc.gov.uk/manuals/sdltmanual/SDLTM00530.htm

If you had a lender prepared to accept your gifted deposit, then you would have got a decent interest rate anyhow. It needs to be substantially better to make paying all that extra Stamp Duty worthwhile.

Richard_Webster

The gift of equity portion would be treated as Potentially Exempt Transfer for inheritance tax purposes.

It would be so treated however you did it.

Also, we got a much better interest rate due to having a higher LTV.

LTV means "loan to value". Now, OK, most lenders will regard the price as the best evidence of value, but as this is not an arms length transaction they have to be more careful about valuation anyway. If the place really is worth £300K then the LTV should be based on that, but, yes, I am sure there are some who are really picky who will use price.

For instance I can recall a case in the past when Nationwide (who to my knowledge never loaned more than 95% even in the boom times) were prepared to loan I think £120K on a house being purchased from a family member for £100K because they were satisfied that it was worth about £160K.

Miss_Tigs

Thanks for the link Tricky Dicky.

We originally queried with the solicitor about just paying stamp duty on the £250k purchase price..... but they seemed to think that it would amount to knowing selling the house as a lower price ie. stamp duty avoidance (as it's a family sale).

However, I now understand that the gift of equity portion would not be subject to stamp duty as long as there is not mortgage owing on it (which there isn't). I will certainly query this with the solicitor.

Thanks again