Can parents sell house to me cheap?

RobDoubleu

Hello all,


My parents have just bought a house for cash which me, my wife and baby son will live in. The aim is that we rent (at 75% market rate) from my parents for now until we are in a position to buy the house from them. My wife is currently on maternity leave and this affects the amount of mortgage we could get, and childcare costs after maternity ends will also make it impossible to buy this house in the next 2 years at least.


The aim is for my parents to eventually sell the house to us for £50k less than they bought it for as they want to gift us £50k.


What are the tax implications for this arrangement and is it even advisable? The other complication is that the property was listed with a guide price of £215k but my parents paid £242k, which is not unusual (house we put an offer in for before went for £30k over the guide price). Will the actual sold price or the valuation be what is potentially looked at by HMRC? Houses are going for well over guide price here.

Thanks

RD

Guest101

Your parents will be liable to capital gains tax, you will be liable to stamp duty


This could be seen as evasion, so worth speaking to your conveyance regarding this.


(there might be implication for them regarding benefits, and for you under inheritance tax too, but these are less likely if parents are in good health and nothing tragic happens)

Thrugelmir

The rent ( or at least the profit on letting) will be taxable in your parents hands.

macman

Your parents can sell you the house for a pound if they want to. But for inheritance tax purposes, it would most certainly be seen as a potentially exempt transfer should they not survive for seven years.

Mr_DB

When they sell you the house (cheaper than market value), I believe the house would be treated as being sold at market value for capital gains tax purposes. You parents maybe liable to CG tax depending on the market value at the time of sale.

There could be an inheritance tax liability if you parents passed away within 7 years of the sale.

RobDoubleu

Mr_DB wrote: »

When they sell you the house (cheaper than market value), I believe the house would be treated as being sold at market value for capital gains tax purposes. You parents maybe liable to CG tax depending on the market value at the time of sale.

There could be an inheritance tax liability if you parents passed away within 7 years of the sale.

Thank you. The house was put on the market at £215K and sold for nearly £30k more so would market value be £215k or what we paid for it? The reason I ask is because pretty much every property I have looked at has gone for AT LEAST £20K over the 'guide price'! Are EAs deliberately putting the guide prices low or is the desperate shortage of housing causing people to pay over market value? Having said that, I guess market value would be whatever someone paid for it?

Pixie5740

The market value is what the property sold for, not the advertised price.

On the surface of it, what you and your parents are proposing sounds fairly straightforward but when you start to look at it there are a number of pitfalls.

A better way to have done it would be to have arranged a private mortgage between you and your parents where the property was put in your name with your parents having the 1st charge against the property until the mortgage was paid off. I'm not sure if it's too late to do that now or not. I suspect it probably is.

The current set up means that:

1) Your parents will have to declare the rental income from you to HMRC and income tax may be payable on it.

2) There could be Capital Gains Tax to pay if/when your parents transfer the property into your name.

3) Depending on how much your parents gift to you in equity then there could be "deprivation of assets" or inheritance tax issues further down the line.

I think it might be wise for your parents to consult a tax specialist to see what options they have.

Mr_DB

The market value rule applies when your mother disposes of the property to a connected person e.g son / daughter.

It doesn't apply to the purchase of the property by your parents.

Lungboy

RobDoubleu wrote: »

My wife is currently on maternity leave and this affects the amount of mortgage we could get, and childcare costs after maternity ends will also make it impossible to buy this house in the next 2 years at least.

This might not be true, TSB for example will accept full wage of someone on maternity but not include childcare if it hasn't started yet.

konark

Your parents can give you the house for nothing if they wish but there may be IHT to pay if they don't survive 7 years and maybe problems if they should go into care or claim means-tested benefits. This also applies if they sell it you too cheaply..

cloo

You should definitely talk to a tax specialist - it may be too late now to create the most advantageous arrangement, but a specialist could help devise the most cost-effective way for you to proceed.