Owning property my dad lives in

econnin

Good afternoon

I purchased my parents house last year following their divorce. The reason for the purchase was that my mother was putting pressure on my father to leave (she has moved away herself) and my father had nowhere to go. He has drink and depression problems therefore he would not be a good tenant and it would have been a nightmare trying to sort out housing for him, possibly on a frequent basis. My mother also needed the capital released from the house and it had been on the market for 3 years. So, I decided to purchase it using my dad's share of the equity as a gift to try and sort the problem out.

It worked like this:

House value: £105k
Mortgage value: £72k (I needed to cover costs and other things)
Amount given to me mother: £51k (half of £105 less saved agent fees)
Amount given to my father: £0k.

My father lives in the property rent free. I will never charge him rent. I pay the mortgage which is capital and repayment each month. I have landlord insurance and am looking to remortgage to an unregulated buy to let. I had intended to live in the property too but I had to move away with work.

If my father ever needs to go into care (which is unlikely to ever happen given his chosen lifestyle) I will sell the house to pay for this.

What are the tax implications of the transaction and current or future arrangements? I understood it that I may be liable for IHT if my dad passes away within 7 years. I also understood that I cannot claim the mortgage interest payments towards other property income profit, as it's not a commercial let, is this right?

Also, if I sell the property in the future, will I have to pay CGT on the rise in value from £105k (the amount on which we based the amounts to pay my mother's half) or £72k because that is what the mortgage was for (and what the solicitors insisted on using for a purchase price with the land registry)?

Is there anything else I need to consider?

Help!

Thanks

jackyann

I can't help you with tax (other than to say that IHT doesn't kick in until the estate is worth £325k) but I would advise you to consider the following:
It is unclear from your post what your father's income is, and it sounds unlikely that he is holding down a job.
If your father is claiming benefits, then he may be eligible for housing benefit for a 1 bed property.
If you were formally his landlord, you could get some rent from this. I understand that you may feel for family or moral reasons that you don't wish to do this (and maybe your mortgage conditions won't allow it)
I would just like to point out that by supporting your father, you are already saving the the taxpayer some money.
You also need to consider maintaining the property - people with these kind of problems are not always good at upkeep.

Your father is lucky to have you to help him. Please remember that you can contact organisations like Al-anon & Mind to get help & advice about practical & financial affairs as well as emotional support (and forgive me if this is old news to you)

purdyoaten

There are, from my little experience so far, others more well versed than me but, for what it's worth:

It looks to me that your father has gifted you £51000 - correct me if I am wrong! This will indeed be included in your father's state should he pass away within seven years of the gift. As the previous poster says this will be irrelevant if his estate ends up being worth less than £325000 - current level.

The good thing is that he gave you a cash gift with which you bought the house and so the value of this gift stays the same. If he had transferred the house to you, it would be the value of the house at death that would count, given that he would have enjoyed the benefit of said gift.

holly_hobby

As more than 40% of the property is occupied by immediate family (ie your dad), you will need to seek a REGULATED buy to let mge (which is based on your income). Not all BTL lenders will accept regulated BTL business, so you would be best placed to use a broker to source a suitable lender - there is also the added issue that Dad was a previous owner of the dwelling, which can prejudice future possessionary hearings, so you may struggle as a whole if the lender gets wind of his prev ownership of the property and decides its an issue (it'll be down to their UW and solicitor whom will guide - so I may not divuge this if not directly asked ) .

As stated IHT kicks in at current rates, where the deceaseds estate (inc non-exempt gifts and transfers) exceed nil rate exemptions (which until April 2017 is 325k pp).

You need to be aware that even though you have formally taken owenership of the property, from Dads point of view his share that he essentially gifted to you, and pays no rent, is classed as a gift with reservation, as such the 7 yr count down to exemption is indefinately suspended, as father is continuing to derive benefit from the gift - this means that the full value of the gift will remain included within the valuation of his estate. (but given what you have said I dont' think IHT will be a consideraton for Dad, so don't worry too much).

Any gift from mum as part of the discounted pch price, does fall under PET regs, as she no longer resides there nor derives any benefit (financial or otherwise) from the gift of capita/property.

Once the property is mortgaged under a regualted BTL or dependants mortgate, you also need to think about what will happen to Dad if you pre-decease him.

Do you want him to remain there post your death ?

If so, you may want to consider effecting life assurance to at least cover the mge debt, which will repay the os mge and secure his home - and leave the house to Dad, and/or leave to A N Other, and effect a lifetime trust for his benefit, meaning that he has right to reside for the remainder of his life/or entry into long term care (which ever occurs sooner).

Speak to your IFA and Mortgage adviser in respect of the various issues you'll have to consider.

Hope this helps

Holly

purdyoaten

holly_hobby wrote: »

As the property is occupied by more than 40% of family (ie your dad), you will need to seek a REGULATED buy to let mge (which is based on your income). Not all BTL lenders will accept regulated BTL business, so you would be best placed to use a broker to source a suitable lender.

As stated IHT kicks in at current rates, where the deceaseds estate (inc non-exempt gifts and transfers) exceed nil rate exemptions (which until April 2017 is 325k pp).

You need to be aware that even though you have formally taken owenership of the property, from Dads point of view his share that he essentially gifted to you, and pays no rent, is classed as a gift with reservation, as such the 7 yr count down to exemption is indefinately suspended, as father is continuing to derive benefit from the gift - this means that the full value of the gift will remain included within the valuation of his estate. (but given what you have said I dont' think IHT will be a consideraton for Dad, so don't worry too much).

Once the property is mortgaged you also need to think about what will happen to Dad if you pre-decease him.

Do you want him to remain there ?

If so, you may want to consider effecting life assurance to cover the mge debt, which will repay the os mge and secure his home - and leave the house to Dad.

Speak to your adviser.

Hope this helps

Holly

That makes more sense - it would appear that I have misunderstood the sequence of events.

holly_hobby

Any PET remains a GWR if the donor continues to derive benefit, unless in the case of property they continue to reside in, a full market rent is paid.

Very basically, if less than market rent is paid by the donor, it comes under POAT regs, which instigates an income tax liability, if this is an issue the donor (dad) can elect to instead have the non-exempt gift/tsf assessed under GWR regs.

GWR/POAT regs can be complicated.

To keep it simple, in this case Dads gift currently falls under GWR regs - BUT as his estate (from what I've read) is highly likely to be much less than the nil rate exmeption available at the time of his death (which won't be any lower than the current 325K even if post Apr 2017 ), it isn't really an issue (unless of course his lottery numbers come in !).

Hope this helps

Holly x

holly_hobby

econnin wrote: »

What are the tax implications of the transaction and current or future arrangements? I understood it that I may be liable for IHT if my dad passes away within 7 years. I also understood that I cannot claim the mortgage interest payments towards other property income profit, as it's not a commercial let, is this right?

As you don't recieve rent from Dad, what would you be appling the mge interest against ?

Its against rental income that the mge interest is applied for income tax purposes, nothing else.

So as you don't and won't be charging him rent, that you'll then delcare for IT, the q is irrelevant really.

Hope that makes sense ! x

econnin wrote: »

Also, if I sell the property in the future, will I have to pay CGT on the rise in value from £105k (the amount on which we based the amounts to pay my mother's half) or £72k because that is what the mortgage was for (and what the solicitors insisted on using for a purchase price with the land registry)?

Is there anything else I need to consider?

Help!

Thanks

Your cgt will be based on the difference between the actual acquistion price and disposal price.

If you will have never resided in it as your primary residence before you dispose of it , then your exemptions and allowances are limited to ....
Acquistion, disposal and professional fees
Improvement costs (but not general maintenance)
Any prev reported cgt losses
and
your annual unused CGT allowance (which is currently £10,900 2013/14 but will no doubt be higher when you do actually sell)


Its worth knowing that if you do reside there as your true primary residence at any point pre disposal, then you can look to claim Primary Residency Relief (PRR), which post April 2014 will automatically include the last 18 mths of ownership regardless of your actual occupancy during that period, and also possibly lettings relief (max of 40k pp), but I say possibly, as lettings relief is a grey area if no rent is paid (your tax adviser will take you further and guide on this).

Hope this helps

Holly

00ec25

jackyann wrote: »

If your father is claiming benefits, then he may be eligible for housing benefit for a 1 bed property.
If you were formally his landlord, you could get some rent from this. I understand that you may feel for family or moral reasons that you don't wish to do this (and maybe your mortgage conditions won't allow it)

it's more than morals - it is not allowed!!!

it would be the father who would make the HB claim and it would be in respect of a property he previously owned himself. As such no HB is payable since "less than 5 years have passed since he last owned it'
see the section on "When you will be treated as not paying rent"
http://www.adviceguide.org.uk/england/benefits_e/benefits_help_if_on_a_low_income_ew/help_with_your_rent_-_housing_benefit.htm#when_you_will_be_treated_as_not_paying_rent

Whilst OP is obviously acting from compassion in buying from his parents, there is no evidence that the father has been compelled by a court order to sell the property and that is the only circumstance under which the 5 year rule does not apply

OP has already categorically stated (and good on him for so doing) that he will never evict his father. Indeed the facts speak for themselves, the whole transaction is expressly so that father gets to live there. As such any council being asked to pay HB would easily be able to show that is this a "contrived tenancy" and therefore is ineligible for claiming benefits since any rent charged would not continue to be so charged were it not for the fact it was being funded from a benefits claim, therefore the "tenancy" exists only because of an opportunity to claim money via benefits - QED > "contrived tenancy"
http://england.shelter.org.uk/get_advice/housing_benefit_and_local_housing_allowance/what_is_housing_benefit/housing_benefit_if_renting_from_a_family_member

zygurat789

holly_hobby wrote: »

Your cgt will be based on the difference between the actual acquistion price and disposal price.

If you will have never resided in it as your primary residence before you dispose of it , then your exemptions and allowances are limited to ....
Acquistion, disposal and professional fees
Improvement costs (but not general maintenance)
Any prev reported cgt losses
and
your annual unused CGT allowance (which is currently £10,900 2013/14 but will no doubt be higher when you do actually sell)


Its worth knowing that if you do reside there as your true primary residence at any point pre disposal, then you can look to claim Primary Residency Relief (PRR), which post April 2014 will automatically include the last 18 mths of ownership regardless of your actual occupancy during that period, and also possibly lettings relief (max of 40k pp), but I say possibly, as lettings relief is a grey area if no rent is paid (your tax adviser will take you further and guide on this).

Hope this helps

Holly

This would appear to be a transaction between connected parties. As such HMRC have the power to ignore the price you actually paid your parents for the property and substitute what they consider to be market value, you can, of course appeal. Given that the official purchase price has been recorded at £72,000 you would have to get a surveyor's valuation to overturn this.
This appears to be a case of the bank of mum and dad where the bank is in need of support and you have provided this with a mortgage.
You may be able to reduce the CGT as above but PPR and lettings relief were introduced because the housing market was very slow and when houses start to sell more freely there will be little use for them and they will vanish one budget.
The annual exemption of £10,900 will increase to £11,000 next year and £11.100 for the year after so not much joy there either.
Presumably your mother's house will be left to you in her will, you will acquire this at the then market value. your cost for CGT, so if you sell fairly soon, no liability.

grey_gym_sock

zygurat789 wrote: »

PPR and lettings relief were introduced because the housing market was very slow and when houses start to sell more freely there will be little use for them and they will vanish one budget.

lettings relief will vanish? ... well, it's possible.

PPR will vanish? ... are you kidding? the 2/3 of the country who are homeowners would by up in arms.

zygurat789

grey_gym_sock wrote: »

lettings relief will vanish? ... well, it's possible.

PPR will vanish? ... are you kidding? the 2/3 of the country who are homeowners would by up in arms.

#
Agreed fingers faster than the brain