Buying a house from in-laws - Capital Gains Tax

Gerrard17

Hi, myself and my wife are first time buyers and have found an old run down house we would like to renovate and turn into a family home. The problem is, whilst we have a deposit and a pre-agreed mortgage for a fair bit more than its on the market for, we don't have the capital to invest in the work needed to renovate the property. Therefore, the in-laws have agreed to buy it for 150k and then also pay the 50k needed for the work to be done and then sell it to us for the total cost (i.e. 200k) once complete in 6 months time. My F-I-L has been assured by his accountant and solicitor that he will not pay capital gains tax providing he can provide receipts for all work done to prove that he has not made a profit.

However, I understand that the capital gains tax allowance for this year is £10,900. So my question is, say we have a 90% deposit of 20k, could we in theory increase the size of this deposit by the in-laws 'gifting' us £10k to add to our deposit (so now 30k) and then buy it from them for 10k more that the total cost (thus they get the 10k back) without incurring capital gains tax? This would allow us to get an 85% mortgage and a much better mortgage with better interest rate.

I should add, we believe (and have been informed by a couple of estate agents) that the house will be worth between 250 - 300k once the work is finished so should have no problem getting it valued at 210k.

Thanks in advance,
Pete

Pennywise

Have you checked with the bank or building society that they'll accept your mortgage application when buying from a related party? I've seen some lenders insist that the property is bought on the open market from an unrelated third party. I'd suggest you pass it by them in advance to avoid any problems down the line.

Also, have you checked the extra costs, i.e. solicitor's fees, disbursements, stamp duty - may all be doubled if your in-laws buy it (kerching, one set of costs) and then you buy it from them (kerching, second set of costs). I suspect the savings in lower interest rate wouldn't make the duplicated costs and disbursements worthwhile.

Gerrard17

Hi, thanks for your response.

Yep we've checked with the lender and they are ok with it as long as there is a 6 month gap between ownership.

With regards to the fees, we have factored these in and unfortunately there's no way to avoid this. We're not doing it this way to get a lower mortgage, we're doing it this way because it's simply the only way we can afford to do it. We havent got the capital to renovate the house. We could of course just buy a standard house but it wouldnt be as much of an investment (we hope to have at least 70k equity (including our deposit) once its done and it will be done to our exact requirements.

somethingcorporate

£100k profit for a £150k house and £50k refurb....?

I very much doubt it, if so it would have been snapped up by a developer for cash.

Be very wary on these figures given the current market.

xylophone

Could you not buy the house as is with the mortgage agreed and then borrow £50,000 from your in-laws?

CLAPTON

You and your FIL are connected persons as far as the HMRC are concerned.

As a consequence HMRC will value the house after renovate at market price and not the price you actually pay your FIL.

If truely the house will then be worth say 300k then your FIL will be assessed for cgt on a gain i.e. 300,000 -150,000 -50,000 - buy/sell costs)

Gerrard17

Thanks for all your responses guys.

Something Corporate - the refurb is being done through a family member's business who will be doing it at cost - the actual cost of the refurb would probably be closer to 75-80 if we went through an independent building firm. I have spent 2 years researching the market in the area we've been looking and am confident it will be worth at least 250k, thus a 50k profit. Developers wanted it and wanted to knock it down and build 2 semis on the plot but they had difficulty with planning.

Xylophone - the problem is we wouldnt be in a position to pay it off quickly and my in-laws arent in a position to payout 50k and not get it back for 10+ years.

Clapton - we wouldnt be buying it for 300k though so how can he be charged tax on a profit he wouldnt make???

holly_hobby

Gerrard17 wrote: »

My F-I-L has been assured by his accountant and solicitor that he will not pay capital gains tax providing he can provide receipts for all work done to prove that he has not made a profit.

You/Dad/Accountant really needs to check with HMRC BEFORE you all dive in, whether they will treat this pch and rapid onward sale without parents renting out OR residing, as wholly an investment transaction, rather than a 2nd dwelling of parents (which really it isn't).

As if assessed as under an investment purchase (pchd with the intention for onward sale at a gain), FIL will be exposed to income tax on any net (of permitted deductions) gain and NOT capital gains tax - with any net gain taxed at his highest rate, and which if the case will somewhat cause some financial issues.

This is vital if there will be any gain (based on market value) that can't be wholly offset - as under cgt regs he'll have something to play with, under IT he'll only have his annual PA that may be applied.

Ensure the accountant understands the difference and bottoms out with HMRC under which regs any gain will be exposed on disposal.

Hope this helps

Holly

CLAPTON

Gerrard17 wrote: »

Thanks for all your responses guys.

Something Corporate - the refurb is being done through a family member's business who will be doing it at cost - the actual cost of the refurb would probably be closer to 75-80 if we went through an independent building firm. I have spent 2 years researching the market in the area we've been looking and am confident it will be worth at least 250k, thus a 50k profit. Developers wanted it and wanted to knock it down and build 2 semis on the plot but they had difficulty with planning.

Xylophone - the problem is we wouldnt be in a position to pay it off quickly and my in-laws arent in a position to payout 50k and not get it back for 10+ years.

Clapton - we wouldnt be buying it for 300k though so how can he be charged tax on a profit he wouldnt make???

cgt is usually based on the ACTUAL profit
however for 'connected persons' the price at disposal is assessed as the market price and not the sale price.

Otherwise people would avoid cgt altogether by giving (or selling at a reduced price) to a close relative to avoid cgt.

However note Holly point about HMRC seeing the transaction as trade and would be assessed via income tax.

nomunnofun

holly_hobby wrote: »

You/Dad/Accountant really needs to check with HMRC BEFORE you all dive in, whether they will treat this pch and rapid onward sale without parents renting out OR residing, as wholly an investment transaction, rather than a 2nd dwelling of parents (which really it isn't).

As if assessed as under an investment purchase (pchd with the intention for onward sale at a gain), FIL will be exposed to income tax on any net (of permitted deductions) gain and NOT capital gains tax - with any net gain taxed at his highest rate, and which if the case will somewhat cause some financial issues.

This is vital if there will be any gain (based on market value) that can't be wholly offset - as under cgt regs he'll have something to play with, under IT he'll only have his annual PA that may be applied.

Ensure the accountant understands the difference and bottoms out with HMRC under which regs any gain will be exposed on disposal.

Hope this helps

Holly

Excellent point. Presumably this would get around the actual value being deemed proceeds as connected persons rule would not apply and could well be the way to go here? Would be interested on views on this as not really my area!

antrobus

Gerrard17 wrote: »

.... Therefore, the in-laws have agreed to buy it for 150k and then also pay the 50k needed for the work to be done and then sell it to us for the total cost (i.e. 200k) once complete in 6 months time. ...

It would be far more straightforward if your in-laws simply lent you the £200k to buy the property and have it done-up by the family firm. If the end result is really worth £300k you'll have no trouble getting a mortgage of £200k when it's finished, enabling you to repay your in-laws.

No income tax, no CGT.:)