Transfer at Undervalue / Insolvency Indemnity Insurance

General_Hogwart

Hi Guys,

I've been reading a few threads on this subject but I can't see any that match my specific circumstances.

I'm buying my Mums house for around 85% of it's value. Therefore, she is gifting me 15% value and I'm not actually paying any cash as deposit. (mortgage offer was based on 85% LTV anyway, it may not actually be that). I'm not actually sure of the cash value of the deposit. It's either £8000 or £18000. I know that sounds strange but I will explain that here -

In my opinion, the house is worth £130,000.
The surveyor valued it at £120,000
The purchase price is £110,000
The mortgage amount is £102,000

So looking at it, it may only be a gifted deposit of £8000!? So having to pay £500 to insure this amount seems daft in the unlikely event that my Mum is to go bankrupt in the next 5 years

The mortgage offer is in place, it's been with the solicitors for a couple of weeks and they have said that next week, we can start discussing exchange and completion dates. All they need is a copy of the building insurance (which we have) and they have said that they are getting a quote for Insolvency Indemnity Insurance.

In a letter from the solicitors, it says - "I note from the terms of the mortgage that they are happy with the fact there is a Deed of Gift or transfer at undervalue taking place and it is therefore a requirement that on completion of your purchase I put in place Insolvency Indemnity Insurance to protect them accordingly. I am currently obtaining a quotation and will advise you of any fees in due course"

I have 3 questions really.

A. Do I need Insolvency Indemnity Insurance?
B. Can I get a quote from this insurance elsewhere?
C. Would I have to pay any inheritance tax if my Mum was to die in the next X amount of years?

If I have to get it and it costs £100 odd then fair enough. But if I don't need it and they quote me £500 (which I have read that it can be up to) then I'm not too keen on paying this.

Thanks for any advice.

davidmcn

If you think it's worth £130,000, and the surveyor thinks it's worth £120,000, where did the figure of £110,000 come from?

Anyway, everyone apart from you and your mum will take the surveyor's valuation as being the actual value (this isn't a situation where it's being exposed to the open market, I presume), so the value being gifted is £18,000. If the lender's solicitor says they need insurance then you'll need insurance - I doubt it will come to £500. Get your own policy if you like, but the solicitors will probably charge you for checking your policy...

Yes, inheritance tax can be payable on lifetime gifts if the donor doesn't survive another seven years. But it's not going to be any more than the tax due if your mum just kept the house.

kingstreet

It's a concessionary purchase for £110,000.

It needed to be valued at £120,000 for the £10k difference to be part of the OP's deposit and he's putting down £8k on top?

If no cash, the purchase price is the £120k valuation and the £110k is irrelevant.

Therefore, the LTV is £102,000 / £120,000 or 85%.

OP - if someone gifts money and is then sued by a creditor, the gift could be reversed. The indemnity insurance is to protect the lender against that action. It covers the legal costs.

You cannot find your own, no.

Yes, the gift is a potentially exempt transfer which means on death within seven years, it would be added back into her estate and if the estate value is worth more than the current nil rate band £325,000 tax would be due, dependent on what year in the seven death occurred.

The indemnity insurance is nothing to do with IHT though, just in case you were working under a misapprehension.

General_Hogwart

The valuation is £120,000 and the loan amount in £102,000.

The offer mentions the £110,000 but I (think) I now understand it's irrelevance.

Mum has now had a letter asking if she is happy to pay £70 for Insolvency Indemnity Insurance. I haven't been given a quote yet. Does this mean that if she pays the £70 then I won't have to get the insurance too will I?

I do realise the insurance has nothing to do with the IHT, that was just an afterthought really.

So if she has no other money in her estate other that what she will be getting from the sale of the house (£102,000), £30,000 of which will be given away to my siblings, and she dies in the next 7 years, will that mean that there is no inheritance tax to pay because her estate is worth less than £325,000 ?

kingstreet

Only one cover is required.

Yes, you are correct about IHT. Estate value under £325k inc earlier gifts in excess of annual limit = No tax.

General_Hogwart

Thanks very much.

Just been going through the paperwork and have another query.

So a reminder. The surveyor valued the house at £120,000

Looking at my mortgage offer the purchase price is £110,500.

I think it may have been suggested that the purchase price was dropped so we had a lower purchase price and that we would still be purchasing it with equity.

The amount that I am borrowing is £102,000 + £1020 fee = £103,020

So Mum has been asked to fill out a gifted deposit declaration. The solicitors have the figures wrong (they are using our very first initial assumed figures of £130,000 purchase price with £19,500 deposit).

What is the amount of gift?

Is it

A. £16980
B. £7480
C. £8500
D. £18,000
E. a different amount?

I'm so confused.

subgoofy

It is really a troublesome problem

davidmcn

General_Hogwart wrote: »

Thanks very much.

Just been going through the paperwork and have another query.

So a reminder. The surveyor valued the house at £120,000

Looking at my mortgage offer the purchase price is £110,500.

I think it may have been suggested that the purchase price was dropped so we had a lower purchase price and that we would still be purchasing it with equity.

The amount that I am borrowing is £102,000 + £1020 fee = £103,020

So Mum has been asked to fill out a gifted deposit declaration. The solicitors have the figures wrong (they are using our very first initial assumed figures of £130,000 purchase price with £19,500 deposit).

What is the amount of gift?

Is it

A. £16980
B. £7480
C. £8500
D. £18,000
E. a different amount?

I'm so confused.

You're paying her £102,000 for something which (according to the valuer) is worth £120,000. So the gift is £18,000.

kingstreet

There's something wrong here. A concessionary purchase isn't acceptable to many lenders and you have to be very careful to construct it correctly at application stage.

If the value is £120,000 and she is gifting you £18,000 the mortgage amount would be the £102,000.

Where's this £110,500 purchase price come from?

How much does she actually want to receive in return for selling you this property? If she is expecting £102,000 it would be a concessionary purchase at £102,000 on a value of £120,000 if you are not putting any cash in yourself.

Are you putting any cash into this to increase your deposit?

If she wanted to achieve £110,500, you would be gifted £8,500 but would have to put in £8,000 in cash to make a £102,000 mortgage correct.

I suspect whoever has put this together has not done it correctly. Who arranged the mortgage and with which lender?

General_Hogwart

We have the offer (which makes no mention of £120,000).

It was put together by a broker and the lender is Skipton.

There was an issue after intitial application as the valuation came in at £10,000 lower than expected. She agreed to drop to £120,000 and to give us £18,000. So she is expecting £102,000.

The offer says purchase price £110,500 and loan amount £102,000 (plus £1020 fees added to loan).

We are not putting any cash in.

The £110,500 price just appeared on the mortgage offer when it arrived.

Still confused as to what amount to put on gifted deposit form.

davidmcn

General_Hogwart wrote: »

Still confused as to what amount to put on gifted deposit form.

Then ask the solicitor, as it's their job to make sure the declaration is what the lender requires.