Advice needed on buying a house for a relative to 'rent'

meandmysis

hello, am new to all this forum-business so please bear with me

My mum needs to move and has an amount of savings but not enough to purchase a home. She also probably wouldn't get offered much of a mortgage because of her age and pension arrangements. Therefore, my sister and I are wondering whether the best course of action would be for us to take out the mortgage and for mother to give/gift/lend us the money for the deposit. The house would be in our names but she would live there either rent free or having paid a lump sum of rent up front (deposit).

Obviously we are not trying to make financial gains from mother but it does seem a mutually beneficial arrangement since she has somewhere to live without financial worry and we get to invest in the property market.

I was just wondering if anyone had any experience of this or any advice on inheritence / capital gains tax pitfalls etc. We do intend to speak to solicitors etc but thought I'd try this as a first step.

Many thanks

McKneff

Is she claiming any means tested benefits.

HappyMJ

You need to set it up as a commercial agreement....i.e she does not give you the money for the deposit. You need to use your own money for the deposit and borrow the rest on a mortgage and rent the property to her on commercial terms so that you can use the rent money to maintain the property and pay off the mortgage.

You could then rent the property to her at a bit less than market rates if you are not trying to make money from her.

You will have capital gains tax to pay when you sell the property. It's not a pitfall it's just a tax on your gain.

Werdnal

You would need a BTL mortgage for a start, as you would not be owner occupiers. This requires a much higher deposit - 25%+, which might mean its not feasible. Some BTL's don't like "letting to family" and many insist on you charging a minimum rent. You would also need to declare this rent for tax purposes.

There any many regulations surrounding letting a property (even if it is family a lot of these would still apply). There is a thread here which should help:

http://forums.moneysavingexpert.com/showpost.php?p=41160642&postcount=12

Do either you/your sister already own property/have a mortgage?

When and if you need to sell "your mum's" home, it will incurr capital gains tax as it is a 2nd property and neither of you live there.

RAS

Your mother would need her own legal advisor as this leaves her open to losing both the roof over her head and her savings. It would not even need either of you to do anything delibarate. Just get divorced or made insolvent.

meandmysis

Hello, thanks very much for those comments. To answer some points, none of us are claiming any benefits, I own a home (mortgaged) with my husband and my sister rents. I think we would be looking at at 50% or lower low loan to value ratio. I've spoken about this idea in principle with a mortgage advisor and they were happy with the affordability levels we were looking at and didn't mention BTL although I didn't really push that point with them. I was only wondering about the 'renting' scenario as we were unsure about putting mum's name on the deeds in case one day we ventured into care home territory, although hopefully that is a long long way off. Are there issues with letting a relative live rent free in a house you own, or is that only if benefits are claimed? And I know you never know the future but I'd think that if it all went wrong we'd just all move in together! Thanks again, please keep the comments coming!

RAS

Sorry. But you do not seem to get this.

It is your mother whose finances are at risk.

And if she gifts the deposit, whether or not her name is on the deeds, the money will be needed for care home fees.

Google deprivation of assets - giving away money to avoid fees or claim benefits.

Werdnal

You would also definately need a BTL mortgage, as it is very unlikely a lender would consider a residential mortgage for this scenario. The clue is in the name - Residential means the mortgage holder is resident, and neither you nor your sister would be.

Where does your mum live now? Does she rent, or already own somewhere?

sandsni

Unless I missed it, you haven't said whether your mum owns or rents the property she currently lives in. If she owns her own home, could she sell it and use the proceeds to buy something where she wants to move to? if she's downsizing you might even find something suitable without requiring a mortgage at all.

Brock_and_Roll

Re Deprivation of Assets, local authorities are getting increasing adept at spotting such deals/transfers of assets. They would look to see who owns the property your mother is renting, and if its a relative their eyes will light up and they will dig deeper (and rightly so as they are protecting taxpayers money)

Nevertheless, if care home fees are perhaps a decade or so down the line, the chances of "getting away with it" are high. The morals of allowing everyone else to pick up the tab are a separate arguement!

meandmysis

Just to clarify, my mother does not own any property and is having to move due to a relationship breakdown. Our choice is this: Either she rents privately and uses all her savings until she is elegible for council help or we help her now by getting a mortgage for her.

All investments incur risks, we are aware of that, and as mentioned previously we will all be seeking legal advice.

We are currently favouring option 2 since it keeps her money within our family but there are several ways we can approach this and we are trying to work out what is the best way.

She is still working, care homes are decades off hopefully! We have the 7 year threshold of inheritance tax on our side also.

Thanks.