Stamp duty

Moneysaver666

Hi there, hoping someone in the know may be able to advise me here.... My father owns a large house with an annexe (which is part of the house) that belonged to his parents. Upon their death he took out a mortgage to pay off his siblings their share. He lived in the annexe portion and rented out individual rooms in the main part of the house to cover the mortgage. He took out an interest only mortgage as that was all he could afford. Fast forward to present day and he only has 3 years left and the bank won't lend again because of his age and he is desperate to stay there.

My husband and I are considering purchasing 50% of the property to the value of the outstanding mortgage, which happens to be £255k (the entire property including annexe was valued at approx 550k by estate agent) and living in the main part of the house. It needs some work - happily my father is a carpenter and has offered to do a lot of work, fitting a new kitchen, etc.

Now my question is this - can we pay £250k for the property, and then pay my dad £5k for the work? We would need to pay him upfront in order to clear his debt, but then he would genuinely be doing work for us and I could get him to do invoices. I'm just worried that HMRC would understandably view this as suspicious.....

TrickyDicky101

How do you intend raising the £255k required to settle the outstanding mortgage?

The easiest way would be for him to pay off £5k from the outstanding balance prior to your purchase of the half of the house at £250k.

Kynthia

So you, your husband and your father will all be joint owners of the property? I would imagine then all three of you would need to be on the mortgage as you can't mortgage part of a property. His age may affect what mortgage you can get and the length of it, so an independent broker might be able to advise you here. You'd probably want the solicitor to draw up a deed of trust that specifies the ownership percentages of the property. Also discuss exit plans, whether to own as joint tenants or tenants in common and get wills.


As far as I know you can mortgage the property jointly for whatever amount you agree as long as it's within the LTV acceptable to the new lender. I know you need to pay off the outstanding mortgage, but this contribution doesn't all need to come from the new mortgage borrowing as you can agree to give your dad cash towards your share too. Probably discuss this with your solicitor as it will all be part of putting the property in joint names. If you see them first they may be best to advise you on the stamp duty issue too.


Do you know the approximate value of the property now? Would half of that actually be over the £250k threshold?

I don't see why you would need to officially pay your dad for the work to the property. It's his property too and if he does work on it and the other joint owners fund it or give him money as a gift regardless of the work I can't see why either option would involve the HMRC. Although it might be different if he's a self employed carpenter already completing tax returns each year, but then I would have thought being paid to work on your own house would look more suspicious.

G_M

* I assume you are paying him cash?
* if you get a mortgage and he remains 50% owner he'll need to be on the mortgage Deed I imagine
* I assume you've investigated/allowed for Capital Gains Tax since he's not been living in the main property
* I assume he's been declaring/paying income tax- if not he might get a sudden shock!
* SDLT: see HMRC

HM Revenue & Customs (HMRC) will consider transactions to be linked if all of the following apply:

• there is more than one transaction
• the transactions are between the same buyer and seller or between people connected with either of them
• the transactions form part of a single arrangement or scheme or part of a series of transactions

holly_hobby

Yes as the property has not been Dads entire primary residence, as he lived in a separate self contained annex, whilst the tenants lived in the main dwelling, with they having no use or access to Dads annex, and Dad and tenants didn't share the entire property as 1 family unit (ie as lodgers would), then he does not have full PRR exemptions, and there will be a proportional CGT calc based on the % of the property used for the business, and the market value of the 50% equity sale to you, as you are connected persons, which may be significantly more than the 255k you say is reqd to repay his os mge. But he would qualify for lettings relief (max 40k) , along with his own unused annual cgt allowance, prev reported cgt losses, acquisition, disposal, improvement costs

You would effect the mge deeds under a Tenants In Common basis, to reflect the ownership ie 50% dad, 25/25 you and spouse.

Wills needed and also a robust plan/life cover (write in trust for his benefit) to take account if 1 or both of you pre-decease Dad, leaving him with a mge he can't afford.

They'll also be SDLT based on the actual consideration - ie the amount of monies/services/assets exchanged for the transfer of ownership, which you say is 255k (giving you a 3% SDLT mulitple).

Whilst you may also have issues in obtaining a mge due to the self contained annex (and certainly will have major probs if it has its own utilities, entrance etc) - hopefully it doesn't have separate provision (ie its own billing or council tax liability), but you will need a broker to bounce this off a few lenders, as even the current lender may decline based on their current criteria.

If Dad is to remain on property deeds (which he will in order to avoid issues caused by the vendor remaining resident post sale), he has to be party to the mortgage (most lenders permit 4 applicants) - and if his income isn't reqd, there are several lenders whom will base the max available term on you, which may avoid a short/unaffordable mge term - you'll need a broker to ensure you dont' waste time and effort in applying to lenders whom wont work on this basis and also accept the s/c annex.

There are also possible IHT/GWR probs depending upon the value of his net estate on death, the GWR issues, and if he remains on the deeds or not (if no mge reqd to pch your share), but this may be mitigate somewhat if there is any prev deceased unused spousal IHT nil rate exemption available for tsf and utilisation on Dads passing) - IFA/tax practioner consultation is strongly advised on this and the CGT issues discussed at the head of this post.

Possible deprivation of assets, if long term care assistance sought and the local authority succesfully cite and prove the TOE exercise to be avoidance based.

Lots of potential issues too complex to go into here, and not meant to disconcert you, but as a heads up, and I would again advise you consult your own IFA/mge adviser/tax practitioner due to the complexeties you need to take account of in your planning.

Hope this helps

Holly

Moneysaver666

Ok wow - thanks everyone for your responses. I thought there might be some issues but this just seems crazy! Just to give some clarification:
- My Dad's portion is part of the house, there is a shared front door and he accesses his portion of the property just through a door in the hallway. However, there are separate utility meters (I'm not sure about council tax).
- We will be requiring a mortgage in order to make this purchase. Is it true that my dad has to be on it even though he's not contributing?
- The value of the property as a whole has been given an approximate value of £550k. My dad's annexe consists of 2 beds, lounge, kitchen and bathroom. The other part, 4 beds, lounge, kitchen and 2 baths.
- My Dad has no other assets, therefore I believed should something happen to him, his half of the house would be within the IHT threshold and therefore we wouldn't have to pay tax on it.
- What if we were to purchase the entire property, so that only our names were on the deeds, and not my Dad's? Would there be implications with him selling it to us for way below market value? Would he still be allowed to live there?
- Alternatively could he gift it to us? Could we then gift him the money? I'm guessing the answer to this is no, but worth a try...!

My Dad is willing to do pretty much any arrangement to just be able to stay there but not have a mortgage (the property has significant sentimental value to him) and we could always draw up legal agreements afterwards to ensure everyone is protected.

Thanks again for any responses - much appreciated!

holly_hobby

Moneysaver666 wrote: »

- My Dad's portion is part of the house, there is a shared front door and he accesses his portion of the property just through a door in the hallway. However, there are separate utility meters (I'm not sure about council tax).

If a mortgage is reqd, there can only be 1 utiilty provision (ie 1 gas/electric/water etc )for the entire property, so it will have to be re-unified. But the fact theres only 1 main entrance etc is a positive.

Moneysaver666 wrote: »

- We will be requiring a mortgage in order to make this purchase. Is it true that my dad has to be on it even though he's not contributing?

Yes, this is due to him being the owner, transferring ownership (partially or wholly) yet still residing there, and is in respect of vacant possession, resulting in possessionary and beneficial interest issues for the lender, which can cause probs if they later seek a possession order. So yes he will have to be party to any mge if the true set up is revealled to the lender.

He'll also be exposed to CGT calc on the partial transfer due to the previous business use as discussed earlier. http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm#3

Moneysaver666 wrote: »

- The value of the property as a whole has been given an approximate value of £550k. My dad's annexe consists of 2 beds, lounge, kitchen and bathroom. The other part, 4 beds, lounge, kitchen and 2 baths.

The set up of the annex is a problem, the main issue being it is effectively giving the property 2 kitchens, which is going to cause real issues if a mge is reqd.

Moneysaver666 wrote: »

- My Dad has no other assets, therefore I believed should something happen to him, his half of the house would be within the IHT threshold and therefore we wouldn't have to pay tax on it.

If you pay full market price for your share, and its a TIC arrangement. His estate pays the tax, which may have to be liquidated to do so. The family are not responsible for any IHT bill. If held under joint tenancy with say a trust deed, it will automatically come to you and be excluded from the valuation of his estate.

Moneysaver666 wrote: »

- What if we were to purchase the entire property, so that only our names were on the deeds, and not my Dad's?

Same issues re vacant possessoin, and his pre and post residency post completion, if revealled no lender will touch it.

Moneysaver666 wrote: »

Would there be implications with him selling it to us for way below market value?

Yes IHT http://www.hmrc.gov.uk/inheritancetax/pass-money-property/intro-iht-plannning.htm , deprivation of assets. Whilst he's still exposed to CGT calc on the market value (regardless for what its tsfd for), due to prior business use.

You'll be exposed to SDLT on the consideration.

Moneysaver666 wrote: »

Would he still be allowed to live there?

IHT/Gift With Reservation issues, lender issues if not on the mge and they have been advised of vacant possession.

Moneysaver666 wrote: »

- Alternatively could he gift it to us? Could we then gift him the money? I'm guessing the answer to this is no, but worth a try...!

Not whilst there's an os mge in his name, plus DOA/IHT issues .

Hope this helps

Holly

Kynthia

Holly's post seems very comprehensive and informative, so I'd make a note of these issues. They aren't insurmountable they just require you to get detailed advice from the experts, particularly a solicitor aware of these various issues, a broker in order to pick the right mortgage lender for the situation, and possibly an accountant familiar with multiple lodgers, CGT, etc. Some of these issues your father will face anyway and aren't a result from you trying to buy half the property so that he can stay there, so don't give up if it's want you all want.

holly_hobby wrote: »

Possible deprivation of assets, if long term care assistance sought and the local authority succesfully cite and prove the TOE exercise to be avoidance based.

I however disagree with this being an issue. There's no deprivation of assets is market value or near market value is received in exchange for a sale of an asset. At the moment the outstanding debt is half the value of the property so the father will be in the same position after the sale if the deed of trust leaves them owning about half of the property. This would definitely be something to consider if the father gives away (gifts) half the property so that's not recommended.

Moneysaver666

Thank you both I will make a note of all issues raised by Holly and definitely intend to consult a solicitor in the first instance, but I'm certainly getting a sinking feeling about the whole thing.

I do have one final thing to note - reference has been made to my dads 'business', I would need to check with him but I have a feeling that he did not register the property as place of business, and I know for a fact all his residents paid cash so I'm guessing he didn't pay tax on the rents he received. Does this make a difference? I'm not saying it's right but, if that were the case and it was just 'a house' and I managed to find a lender that would allow my dad on to the mortgage, that that would alleviate the main issues? In any case as it's one property that is shared and he is effectively renting rooms to lodgers... Would he really have to pay CT tax upon selling?

00ec25

Moneysaver666 wrote: »

In any case as it's one property that is shared and he is effectively renting rooms to lodgers... Would he really have to pay CT tax upon selling?

it is not one property. It is two self contained spaces and they are not lodgers they are tenants. Even if there is no written agreement in place they have the legal rights of tenants, not the very few rights of lodgers. They do not share any facilities with your father so these would be held to be self contained lets which make then tenants not lodgers. If he has not been paying any tax on the rent he has received then you need to seek professional advice on the how to progress this because HMRC will be far from happy.

He is liable for Capital Gains Tax (I assume CT was a typo) because the other occupants are living in a self contained space.Note even if he tries (he'll fail) to argue they are "lodgers", then he is still liable to CGT because CGT applies where there are 2 or more lodgers.

I suspect that by sentimnetal attachment you mean he has owned this proeprty for a considerable time? If so then the capital gain might be large. If its "worth" 550k then as Holly says he will get a maximum of £50,900 offset against the gain for letting relief and personal allowance, so if his gain (current market value - original purchase price) is more than 50,900 he will have to pay CGT on the excess over 50,900.

Moneysaver666

It's of sentimental value because he grew up there - his parents bought it in the 60's and had to pay off 4 other siblings upon their death in order to keep it. Although he does not occupy the part of the house the tenants are in presently, he has in the past. - does that count?