Buying property for children etc.

Talulah256

Firstly, this is the first time I have posted on this website, and so I apologise if I have posted this thread in the wrong place. I am looking for some advice regarding a potential house purchase that my parents will be making. This is a tad complicated, so please bear with me! I would like to very respectfully ask that any people responding do actually have knowledge of tax/gifts/loans to children etc.

My father recently inherited his late mother's flat. In the immediate future he is looking to rent this out to bring in a little extra income. However, due to several reasons he doesn't think he wants to keep hold of the flat in the long term. So he's considering options. If he sells there is a small possibility he will incurr CGT, however he hopes to avoid it as the flat isn't likely to increase much in value over the next 18 months/2years.

One option is to buy another house and rent it out, however there will of course be income tax involved, which may be higher than normal as he is a director of a Ltd company and therefore doesn't have an awful lot of tax free income allowance left. There is then the issue of a CGT liability if he sold it in the future, or an IHT liability if it were kept and transferred to myself/sister.

Myself and my husband have one daughter and are stuck in a one bed house. We bought in 2007 and have now only a token amount of equity. We would love to have another baby, but unable to extend our family in this home. We therefore face either not having a baby, waiting possibly 5+ years before having another, or selling up and renting. We have looked into alternatives to the last option, but due to mortage rates, lack of equity etc none are an option.

An option that was put to us was my parents gifting/interest free loaning the money from the sale of the flat. We could then buy a new house with this money, taking a small mortgage to make up the difference. We would then make monthly payments to my parents. If we took it as a gift, the monthly paytments would be classed as income so the interest free loan route seems a better option. We would make an agreement that the loan would be paid back over x number of years.

This way my parents get a regular income back from their investment, but woudln't need to pay tax. They don't want to sell the flat and pay off the mortgage and invest the remainder as the income from that wouldn't be much at all. Whereas the above gives them a long term set amount. Potentially, in the future should they want a small lump sum we would be able to re-mortgage to release more money as the mortgage would be relatively small. We have enough working years left that we can see out the term to repay the amount.

After the money is paid back, we could continue to pay for say another 10 years. As rules stand now, woudl this be treated as income and need to be declared or could it be treated as a gift or allowance to my parents and no tax inccured?

This way does solve the CGT and IHT issues that exist at the moment. Has anyone got any advice they could share with me? I hope I have explained it in a way that makes sense!!

fawd1

I'm not entirely sure, but you might struggle to get a mortgage for even a small amount if the money was considered a "loan". This is purely based on the amount of debt you will then have. Although it might be preferable in regards to your parents income, it might actually mean you can't buy at all! Worth contacting a solicitor specialising in property to see what they say.

tyllwyd

You might get more detailed responses on the cutting tax board.

I think you need to get proper advice from a solicitor about tax implications etc before you go too far. One problem I can see is that your parents lend you a large proportion of the deposit for a house, you might struggle to find a mortgage company willing to lend the remainder.

And you need to think through all the family implications - what happens if your parents spit up? what happens if you and your husband split up? what happens if you fall on hard times and cant/wont repay your parents? what happens if they fall out with you and demand all their money back immediately? you need to think about all the worst-case scenarios as well as the advantages.

Talulah256

Thanks for replying. I did speak to an accountant who has knowledge of these things and he advised that technically, the mortgage company wouldn't need to know about a private agreement between my parents and myself. My father will of course seek legal advice before doing anything, but before we go down that route he wants to get as much info as poss.

Courgette

I think you might be better off posting this on the house buying and selling part of the board as there are some pretty knowledgeable people over there.

Should also warn you that there are, in my opinion, some real nasty willy waggling bullies over there too so please don't take it personally if some posters are a little unkind (or maybe they just hate me!).

fawd1

Maybe it would be worth looking into a shared ownership agreement? In that, your parents buy 50% of the house, gift you the remainder of the cash for your deposit, and then you can get a mortgage for the remainder. That way, you get the house, but they still have some legal security knowing that they still have a stake in the property. Then when you pay them, you'd be paying rent for their 50% of the house. It also gives you the option of buying them out at a later date if it becomes feasible for you to do so.

Talulah256

tyllwyd wrote: »

You might get more detailed responses on the cutting tax board.

I think you need to get proper advice from a solicitor about tax implications etc before you go too far. One problem I can see is that your parents lend you a large proportion of the deposit for a house, you might struggle to find a mortgage company willing to lend the remainder.

And you need to think through all the family implications - what happens if your parents spit up? what happens if you and your husband split up? what happens if you fall on hard times and cant/wont repay your parents? what happens if they fall out with you and demand all their money back immediately? you need to think about all the worst-case scenarios as well as the advantages.

Thank you. We have looked at those details. The money is my fathers so in the extreme unlikelyhood of my parents breaking up my father woudl receive the money every month. If myself and husband divorced he would waive all right to any portion of the money and my parents and I woudl agree the next step. A family fall out is unlikely, and difficult to plan for! You could plan for every small possibility but as my parents did agree, its not always possible. If we did fall out, my parents would not demand all the money and leave their family homeless. I understand where you are coming from, but its not always easy to plan for every single smallest scenario. This is a sentiment shared by my parents also.

Talulah256

fawd1 wrote: »

Maybe it would be worth looking into a shared ownership agreement? In that, your parents buy 50% of the house, gift you the remainder of the cash for your deposit, and then you can get a mortgage for the remainder. That way, you get the house, but they still have some legal security knowing that they still have a stake in the property. Then when you pay them, you'd be paying rent for their 50% of the house. It also gives you the option of buying them out at a later date if it becomes feasible for you to do so.

Thanks. We have looked at this but none of us want to co-own a property, and this was advised against by the accountant. This way doesn't solve any of the tax implications either.

Fire_Fox

This sort of issue comes up repeatedly on the 'House Buying Renting & Selling' board, it's worth running an advanced search. Your father should not become a landlord unless he is fully prepared to do LOADS of research, there is a ton of legislation to comply with, taxation is actually the least of his worries.

Loaning and gifting you the deposit are two very different kettles of fish with very different implications for getting a mortgage, being eligible for state benefits should you need them and taxation. If you intend to 'gift' your parents money on a regular basis this is income, so liable for income tax! Lenders do need to know about your repayments to your parents because this affects their affordability calculations, and the fact that your parents will have a claim on the property because this affects the lender's security. You must always be truthful on your mortgage application or you risk being accused of mortgage fraud.

You should look more carefully at the divorce implications and your plan of your mother or your husband waiving their rights to the money, some judges will not agree to an inequitable settlement, the state may see this as deprivation of assets if any benefits or social care are claimed thereafter. You may be able to formalise things with a deed of trust and you must all prepare wills.

golum81

Your father will only suffer CGT liability on the flat if the value of the property increases from what it was valued in the estate. He would also have a CGT allowance (currently £10,600), so would only pay CGT if the gain was over this.

The money as an interest free loan could pose many difficulties (as already advised) regarding a mortgage and affordability calcs, and for your father, declaring an income from you.

It might be worth looking at having the money as a gift. Initially this has no tax implications for anyone. It only becomes taxable if your father died, at which point IHT comes into play. But if it is within 7 yrs, taper relief can be applied, and if it is over 7yrs, then there is no tax liability at all, and the funds are not included within his estate.

One issue which may arise is your sister. If we are talking substantial amounts (which I guess we are) it may be worth either your sister being given an equal amount at the time of the gift to you, or a proviso being put in a will to avoid sibling jealousy.