Adult kids buying into equity of our house?

Sadie_Su

We find ourselves in our late 50s with two houses and two mortgages - not ideal, but the down side risk is covered. We have about 70% equity in House A, and a repayment mortgage on the other 30% that will be cleared in 15 years. The rental more than covers the mortgage payments.

We live in House B, having inherited about 60% of the equity, with the other 40% (bought from a sibling) funded by an interest only mortgage that has seven years to run. This house a bit of a fixer-upper, in a good location. It has the potential to increase substantially in value when the housing market eventually recovers, and we would therefore like to hang onto it as a long term asset if possible, although if necessary we can sell it, and buy a smaller property outright with the 60% equity.

We have two young adult children in good jobs, who are not yet on the property ladder. They are interested in buying the 40% of House B that is currently mortgaged, as a long term investment. We appreciate that what's needed here is professional advice, but hope to pick your brains for ideas on how best to approach this....

Trying_to_be_good

I guess (trying to help but not a professional) you'd need to carry out a formal Transfer of Equity (TOE) adding their names to the deeds, and Amy mortgage would then need to be in all names (unsecured loans wouldn't but normally aren't available for house purchases).

More significantly, perhaps, is what happens when one or both want to set up home with new partners/families? Their equity/savings would be tied up in your home rather than available as a deposit for their own home, so they'd be starting from scratch saving another deposit etc. Also, if they already have a mortgage, that's counted against their income for a second mortgage.

So it really depends what else they may want to do.

Cornucopia

I agree - it really depends on what the arrangement is really intended to be. Is it a loan, which you will eventually pay off? Or is it more of a gift, designed to eliminate your mortgage costs, and mitigate the fact that it is an Interest-only mortgage.

Thrugelmir

Given that the mortgage only has 7 years to run. Then you need to at least switch this to a repayment mortgage if the aim is to retain the property as a long term investment.

getmore4less

Likely to create CGT issues.

exit plans should they need their equity back.

Will it still need a mortgage.

Who pays for repair/maintanence/fixing up.

Sadie_Su

The kids are in their mid-twenties, neither has a long term partner yet, and they do not currently have mortgages. Number One lives and works in London, and anticipates renting a flat as a long term option. Number Two lives at home and works locally. The key piece in the puzzle is House A, i think, which gives manoeuvring room if circumstances change.

My thinking is that we retain 51% of our equity in House B, and gift the other 9% equally to the two kids. They take out a joint repayment mortgage for the 40% balance. We pay them rent on their 49% of the property, which covers their mortgage repayments. We cover expenses we would be liable for as tenants, and all four of us are responsible for upkeep and improvement of the property.

Alternatively, we gift them the 9% then the kids gradually buy additional equity in the house from us, and we use the money to reduce the interest only mortgage over the next six years. I calculate that doing this would halve the outstanding mortgage, and let them buy 20% of the equity. At that point they take out a joint repayment mortgage for the reduced balance.

At any point we have the option to sell House B and divvy up, if circumstances change. OH and I can go and live in House A, and the kids will have accrued enough capital to give them a decent deposit on property of their own. Any assets we leave when we fall off our perches will belong to the kids anyway.

Thoughts? :think:

holly_hobby

Sadie_Su wrote: »

My thinking is that we retain 51% of our equity in House B, and gift the other 9% equally to the two kids. They take out a joint repayment mortgage for the 40% balance.

This would be a simultaneous transfer of equity (on a tenants in common arrangement) under a remortgage (as you already hold legal title) all 4 individuals (if you and your hubby are alrady owners) would need to be party to the mge application and meet status requirements. With the term possibly restricted by your age and the lenders max age at redemption, there being sufficient equity (which appears there is), and income being appropriate and sufficient to support (of which usually the 2 highest incomes (with occassionaly +1 of the 3rd, able to be used in affordability assessment).

As you must be party to the mge with your children, you will also be jointly and severally (singularly) liable for servicing of the entire mge debt.

The TOE element would not qualify for free legals (on any fee free deal you may consider), and will cost circa £400 - £600 to effect.

Sadie_Su wrote: »

We pay them rent on their 49% of the property, which covers their mortgage repayments. We cover expenses we would be liable for as tenants

This essentially makes the transaction a sale and lease back arrangement (albeit you are remaining as partial legal owner) - which is generally not permitted by the majority of lenders. Of course you may choose to conceal this fact - which would be your own choice.

Children have to declare rental income annually to HMRC via self assessment (unless rental inc is less than £2,400pa), for tax purposes (although they may offset applicable mge interest and other permitted deductions.)

Sadie_Su wrote: »

Alternatively, we gift them the 9% then the kids gradually buy additional equity in the house from us, and we use the money to reduce the interest only mortgage over the next six years.

Any amendment of deeds to reflect their legal ownership will require they being added to any existing mge under a transfer of equity - this is in respect of possessionary rights of the lender - so although sounds simple, essentially it may not be.

Why can't you just bequeath this to them ? Or are you struggling to pay the mge ?

Sadie_Su wrote: »

I calculate that doing this would halve the outstanding mortgage, and let them buy 20% of the equity. At that point they take out a joint repayment mortgage for the reduced balance.

Purchasing equity, taking mges etc and the resulting transfer of equity requirements etc discussed above.

Sadie_Su wrote: »

At any point we have the option to sell House B and divvy up, if circumstances change. OH and I can go and live in House A, and the kids will have accrued enough capital to give them a decent deposit on property of their own. Any assets we leave when we fall off our perches will belong to the kids anyway.

Exposure (subject to residential status) of CGT to non-resident children

Sadie_Su wrote: »

Thoughts? :think:

Messy and complicated mge wise.

Tax wise - children exposed to possible SDLT (if the sold equity exceeds nil rate band), CGT on any gain on their share on disposal and tax on profits from rental income.

Children will be joint legal owners of the property - meaning they may legally seek use it as sureity for finance and/or creditors may seek to obtain a charging order on their share for unpaid debts

Children may force sale

Existing mge commitment will affect their fuure applications for any mge or finance.

Would help to know what is the purpose of this excercise if not to mitigate your current costs ?

Hope his helps in the meantime

Holly

Annisele

Sadie_Su wrote: »

My thinking is that we retain 51% of our equity in House B, and gift the other 9% equally to the two kids. They take out a joint repayment mortgage for the 40% balance. We pay them rent on their 49% of the property, which covers their mortgage repayments. We cover expenses we would be liable for as tenants, and all four of us are responsible for upkeep and improvement of the property.

Sorry, but I think that sounds like it'll cause a horrendous mess.

Generally (not quite always) all the people named on the deeds of a house need to also be named on the mortgage. So, you'd be looking at a four-way mortgage between you two as parents and your two children - and that'd be neither a true residential mortgage nor a true BTL.

If you get over that hurdle and manage to find a mortgage that just your children can take out, you'll hit another problem. If your children take out a mortgage on a property you've been living in for years, and you stay living there, then if your children stop paying the mortgage then you might be able to prevent the lender taking possession. Mortgage lenders don't like to lend on a property they can't repossess, so they'd be unlikely to lend in the first place.

As to tax, you paying your children rent on the 49% will cause an income tax liability for the children. The child who doesn't live in the house will also have a capital gains tax liability on sale. And both of them might have an inheritance tax liability on your death, as this has "gift with reservation" all over it.

And that's before you get into what happens if you or your children get married / divorced / die / go bankrupt / become too ill to work but can't claim benefits because they have capital tied up in your house.

Can't you just sell House A?

Edit: Holly said this better than I did!

getmore4less

What are you trying to do?

Creating a complicated financial structure for no reason by the looks of it.

there are probably much simpler ways to do what you want.

Describe the problem first not your interpretation of a solution.


whats the CGT exposure on A?

Sadie_Su

Thank you all for your contributions - all advice is most welcome.

There is some sentiment involved....House B has been the family home for 50 years now, and we like living here. But mostly it's a financially led decision chain. House B is a bit of a fixer-upper, in a prime location and on a big plot. If as a family we hold and improve the asset over the next 20 years, then it's going to be worth a LOT more money than it is now, and the kids have a vested interest in making that happen. OH and I have no problem paying the interest only mortgage, but we can't afford to convert it to a short term repayment one - and because of our age, we won't qualify for a long term repayment mortgage, not without the kids on board.

Sadie_Su

getmore4less wrote: »

whats the CGT exposure on A?

Potentially large, as it was bought 20 years ago for a quarter of it's current value. But if selling House A was part of the game plan then we would go back and live there for as long as necessary, while renting out House B.