Buying parents house from them ?

M635

Hi,

Sorry I’m not sure if this is the right place to post this question, but here goes.

Myself and my two brothers are looking at purchasing our parents house from them, they are going to continue living there rent free while the 3 of us pay for the mortgage.

In turn they want to give us the money back (the equity) and split it 3 ways, like an early inheritance as such I suppose, as we in turn are then using the money as a deposit to buy ourselves a home each.

The cash my parents will receive from us buying the house, will be around £100k(after paying off the remainder of their mortgage etc), and this will be split 3 ways between my brothers and I.

The question is , are either myself and my brothers or my parents liable for any tax, or can they just gift us the money, as I’ve been told by collegues at work that we wouldn’t have to pay tax, provided my parents lived for another 7 years ? (Sorry that sounds really heartless !)

And if this is true, is there a particular way it has to be done, or is it as simple as we buy it, they get the money and they just give it back to us ?

Thanks

Thrugelmir

If the property is sold with reservation, i.e. right to rent free occupancy. Then your parents may well find themselves liable to IHT.

Mortgage lenders will not like such an arrangement.

Also should your parents incur care home costs the sale may well foul of deprivation of asset rules.

Whatever your objectives seek professional advice. As the loop holes were closed many years ago.

herbiesjp

If they still live in the property, without paying full market rent, in terms of inheritance tax the property still belongs to them.

M635

Thanks for the replies, they are not likey to go into residential care in the near future as they are 59/65yrs old, I suppose the other option would be for them to gift the house to us and then we just remortgage to release the equity ?

herbiesjp

They cannot gift the house if they still live in it.

If they gift the house they either have to:

1) move out
2) pay full market rent

Otherwise IHT will still be possible.

kingstreet

They aren't gifting the property. They are selling it. If the siblings buy it from them it's not the property which is the gift, but the cash they realise from the sale.

If they gifted the property then didn't pay a fair market rent they would fall foul of the GWR provisions.

The cash gifts become PETs and face the possibility of a claim of deprivation of assets if there is/was a foreseeable need for care in the near future.

How much is the parents' total estate?

Thrugelmir

M635 wrote: »

Thanks for the replies, they are not likey to go into residential care in the near future as they are 59/65yrs old,

What's important is the transaction itself. Not when it occurs.

M635

Thanks for your help, I'm going to look further into PETs now I know what the 7 year thing is called.

Thanks

kingstreet

Is the total estate more than £650k?

If it isn't you can stop worrying about Inheritance Tax.

M635

No its not that figure, but you're right, basically siblings buy the house from parents, parents then gift back 100k to siblings from sale of house, and in theory parents go on to live for X number of years (over 7)

kingstreet

Ok. There are no IhT implications we can see.

I have a mortgage implication you probably haven't thought of.

Let's say you and the brothers take out a £100k mortgage over 25 years. That's likely to cost in the region of £600 per month at 5% per annum. You each get £30k, give or take.

That's your deposit sorted out. So you start to look for a property. You earn £30k a year, so you find somewhere for £150k and want to borrow £120k. That's 4x income, about right for the current market.

Then you get the bombshell. The mortgage on your parents' place is "joint and several" so your new lender will take it off your income, just in case you have to pay all of it if your brothers default. They will suffer the same problem.

That's £600 x 12 = £7,200. Your income drops to £22,800 and your maximum mortgage falls to £91,200 with your maximum purchase price dropping to £121,200. You've gained a £30k deposit, but in doing so you've lost the extra money which was going to get you a better property.

Obviously you can apply your own figures to this to see how it stands up.