Buying in-laws' house - advice

bbanyard

My wife gave birth to twins three months ago and we very quickly ran out of space in our home so we decided it was time to find somewhere larger. We have just accepted an offer on our property within a week of putting it on the market (sorry - not gloating - but might explain the thought process here!).

Our plan is to move in with the in-laws in the short term and then either buy their house for a reduced price and for them to find another property, or we will buy somewhere subsequently. My father-in-law is retired and my mother-in-law works part-time - they own their house outright and would use the proceedings of a sale to us to buy the next place for 100% cash while we would get a mortgage to buy their current place.

The problem we have is that my wife is on maternity leave and will only be going back to work part time at best. We would also have a high LTV (around 87%) and although our current lender is happy to give us the dough provided we get a letter from my wife's employers confirming there is a job for her to go back to we will unsurprisingly be paying through the nose on a high rate (6.49%) for a couple of years.

Just wanted to get some opinions as to what we could do between us (my in-laws, my wife and I) to ensure we all do OK out of the situation. I'm sure there are pitfalls to buying from and selling to relatives but just wanted some fresh pairs of eyes on our predicament to see what we could do?

Might there be tax or legal implications?

Any thoughts gratefully received!

jackyann

Can't help with the legal / tax implications.
I think a major factor is whether you have siblings who would also expect a share of your parents' generosity.

For myself, as I regard the early years of a child's life as critical, I would do anything in my power to help my children raise their children securely. In your parents' position I would do something like taking as reduced a price as I could.
Could you even consider buying a house for your parents, then agreeing to live in each other's houses?

You will need proper legal advice.

bbanyard

Thanks for that, jackyann. My wife is an only child so we have no sibling rivalry to worry about - like you they just want the best for their daughter and grandchildren and are happy to downsize but without the usual benefit of pocketing the difference in the houses' values.

xylophone

As far as I can see, if your parents sell their principal private residence to you at less than market value, there would be no CGT implications for them, as they would be covered by the Private Residence exemption (assuming it has always been their home)?

There could be a potential IHT charge, if they were to die within 7 years of the transfer, as they could be deemed to have gifted the difference between market value and sale proceeds?

As you plan to use the property as your own home, the fact that you acquire it at undervalue should again not cause any problems, unless you stop living in it, buy elsewhere and sell it on at a later date in which the "base cost" for any CGT calculation would presumably be the true market value at the time you acquired it?

You and your parents should certainly take professional advice.

CLAPTON

the only real issue is getting and paying for the mortgage on your parent's property

kingstreet

Are you going to be paying them the full market value, or will they give you a discount?

If there is a discount involved, this can be treated as part of your deposit to reduce your loan to value and hence your mortgage rate. It's known as a "purchase at undervalue by a family member" and needs to be dealt with specially by the lender and solicitor involved.

bbanyard

I have had a brief conversation with an IFA where the concept of "purchase at undervalue by a family member" was broached although I must confess that it didn't make much sense...I guess this is a method of driving down your LTV in that you are effectively gifted part of the property's true market value which is then added to the deposit? Anyone care to elaborate?

kingstreet

No need. You're correct.

Let's say normally, you buy for £100k with a £20k deposit. That means an 80% mortgage. The vendor gets £100k.

In this instance, the property is worth £100k but your inlaws sell it to you for £90k. Provided it values at the £100k value when the surveyor visits, the £10k reduction becomes part of your deposit, so you have that £10k, plus your £20k, making a £30k deposit in total.

So you have a property worth £100k with a £70k mortgage, or a loan to value of 70% = better mortgage rate. The vendor gets £90k, not the £100k, so it's a gift from a family member.