Transfer of equity or Cash purchase

askgps

HI,
If some one can help me. One of my old age relative (Pentioner) has a house and have difficulty in mortgage payments. The outstanding loan is £35000 and the current value of the house is Around £70000. She does not want to sell the house. As she have memories with the house and she is 74 years with a good health.
She asked me if i pay her outstanding debt which is £35000 and accept her as a sitting tanent. In this way the house is mortgage free.
What should i do as i really want to help her and which one is better purchase a transfer of equity or cash buy.
Thanks

kingstreet

askgps wrote: »

HI,
If some one can help me. One of my old age relative (Pentioner) has a house and have difficulty in mortgage payments. The outstanding loan is £35000 and the current value of the house is Around £70000. She does not want to sell the house. As she have memories with the house and she is 74 years with a good health.
She asked me if i pay her outstanding debt which is £35000 and accept her as a sitting tanent. In this way the house is mortgage free.
What should i do as i really want to help her and which one is better purchase a transfer of equity or cash buy.
Thanks

I'm not sure what you mean.

If you want to pay off the mortgage, you do that as you conduct a transfer of equity. Effectively, the present owner will be selling you half the property. The property should be changed to tenants in common on a 50/50 ownership basis if you are going to own half each.

holly_hobby

As Kings says, I'm not sure what you mean ?

As a side note, if this is a complete transfer of ownership, you won't be able to obtain a mortgage to fund any of the pch, given that your relative will remain resident post completion.

If this is a partial tsf of equity (ie shared ownership), they would need to be party to any mge application - and given their current age - this would just about rule out all mge lenders and their max application and redemption age.

So cash is king in this situ, you just decide how you will be splitting the ownership (under a tenants in common arrangement if they want another individual to benefit from their share on death).

You need to discuss the whys and wherefore's with your conveyencer, whom will guide to the most appropriate arrangement - also update of wills would be an idea.

Hope this helps

Holly x

askgps

Thanks for your replies. The lady is my mother in law. And she want to remove her name from the mortgage deed, ( the deed is on her name). The mortageg will expire in 14 months time. As it is interest only mortgage so she has to pay £35000 before mortage expire. Its natural she loves the house as she stays there more than 50 years.
Obviuosly we can not afford £70000. If we buy at £35000 then when ever we sell we have to pay CGT (capital Gain Tax) which is in our case 28%. Some one told us we can transfer the equity which is regarded as gift in future and we do not need to pay CGT when we sell the house. Sorry my knowledge is not uptodate in this matter. So in this case what should we do?

holly_hobby

Rightho...

You are purchasing effectively 50% for 35k cash.

Which will enable MIL to redeem her os interest only mge, and remain resident until her death or entry into long term care (when her 50% may be assessed as part of any means testing for state assisted long term care funding).

Yes, you are exposed to CGT on your share of any gain - which at 28% means you are a higher rate tax payer already.

If you hold this as tenants in common, and MIL bequests her 50% to you and/or her child on death, you will still be exposed to CGT on your share of any gain disposal.

This would equate to your share of the sale capital, less your cost of acquisition, less you annual CGT exemption allowance (£10,600 per individual for 2012/13).

However, if both you and her child effectively pch the 50% between you, ie you both go onto the deeds with her, you & child would effectively have 25% each (50% as a couple if you like), but be able to offset £10,600 from each of your own share of the sale capital.

i.e instead of having just £10,600 applying to a straight 50% share belonging to you or her child,, you now have an equivilent £21,200 CGT allowance against the same sum, which should make a real impact on your 28% exposure .....

OR if your spouse is a basic rate tax payer, you could look at splitting the 50% MIL has sold, more heavily weighted in their favour. Of course some number crunching to see how this would play with the cgt allowance and which way would be more advantageous to you regarding final figs should be done. Does any of that make sense ??

Ok, moving to MIL and her share.

Under Tenants in Common (TIC) she can bequest her 50% to whomever.

She wants to bequeath it to you/her child - thats fine, make sure she has a valid will, imperative if there are other siblings to your spouse.

I am also assuming given the details of your post, that her net estate will not exceed IHT nil rate band of 325k.

So, she passes and bequests her 50% of the property to you ..... there wont' be any IHT or CGT at this stage.

You later however wish to sell the property, lets assume you don't live in, or haven't lived in it, before sale.

As you know, and as discussed, you are exposed to CGT on any gain realised on your purchased 50% share (either as an individual or couple ... however you set it up). The CGT exposure will be equal to the difference between the applicable share of profit, less cost of acquisition, less unused annual CGT allowance.

You will also be exposed to CGT on your inherited share too .... but the CGT gain exposure will be different, because you instead of an acquistion price, will instead apply the value of the property when the donor died to the equivilent profit. Again, any of your unused annual cgt allownance can be applied to the gross gain - which should be lower than on the origianal 50%, as MILs value will be appropriate to the value of the property on her passing (assumption is of course that the value of her share will be higher than the current 35k equiv to 50% share post your pch).

IF the propety is your primary residence at sale, or has been at some point before, the CGT exposure will be different due to the additional reliefs, allowances and expemptions that may be applied.

Hope this helps .... and not too confusing !!!

Holly x

PS - have dug out HMRC basics re CGT & property which may help - http://www.hmrc.gov.uk/cgt/property/basics.htm