How to buy-to-let with my mum (for my sister!)??

My mum is buying a flat in Surry for my sister to rent from her. She can get an 85% mortgage to do this. I want to provide the other 15% of the purchase price by extending the mortgage on my own house. The rent will be shared in the same proportions.

Is this possible? Should my mum buy the house and I just give her my share - and we draw up an agreement that when the house is sold I get 15%?

What would be the tax implications?

Can we buy the house jointly in those proportions? would that stop my mum getting the buy to let mortgage (which will be interest only over 5 years btw). The plan is my sister will be well into her career by then and buy the flat from us. If she cant, we'll sell the property anyway as my mum will be retiring.

Thanks v. much
Nice to save.
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Replies

  • lisyloolisyloo Forumite
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    You can buy in whatever propertion you like.

    You cannot give a gift (in tax terms) with strings attached i.e. a contract to give it back.
    This will not qulify as a gift in terms of tax so it won't work.

    You will have to pay income tax on any income from your 15% and your mum will have to pay tax on any income from her 85%.
    The same split will apply for capital gains tax when you come to sell.

    Yes I think your mother will have problems with the mortgage.
    For her share it will be a 100% mortgage and not an 85% mortgage (remember she only owns 85%).
    She is trying to borrow the whole lot.
    If she cant, we'll sell the property anyway as my mum will be retiring.

    You are aware that property prices are now falling aren't you ???

    There is a chance that in five years time the property will not be worth what you bought it for.

    Have you considered this possibility ???

    If not then I strongly suggest you do and start reading the recent house price surveys e.g. Halifax, Nationwide, Rightmove, Hometrack which show prices falling.

    Hometrack will give you a brief report on the postcode for free at
    https://www.hometrack.co.uk

    You can also access their reports from the home page.
  • RafterRafter Forumite
    3.8K Posts
    If it were me I'd let your mum buy the house outright but make sure you have a formal agreement about the deposit you have paid.

    Since you don't seem to want to profit from this deal (you are just helping your sister out) there shouldn't be any tax liability since costs (mortgage payment) should match income (rent).

    I would suggest that your sister just pays the interest bill (on the mortgage taken out by your mother and the money you have lent as deposit) so no tax.

    Since this amount should be a lot less than a commercial rent, your sister should be able to save some money (in a tax free isa for example) each month so that in 5 years time she has built up a reasonable deposit to put towards buying out your mum and you.

    You are taking the risk that the property is worth less in 5 years time than it is now as lisyloo says, leaving your mum with a negative equity issue when you comes to sell.

    To protect against this your sister could pay your mum more than just the interest, although this could create a tax bill for your mum on the rental profits.

    I'll stop now before making this any more complicated!

    R
    Smile :), it makes people wonder what you have been up to.
  • lisyloolisyloo Forumite
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    Note that income tax is not the only tax to worry about.

    Because your mum isn't living there then she will have to pay capital gains tax on any gains she makes when she comes to sell the house (if there are profits).

    Also note that if you let your mum buy the house outright then it could be complicated if she dies (because your £15K will be in her estate).

    You would need to make sure that your mum alters her will to make sure your £15K comes directly back to you on her death (I am not sure whether a formal agreement would suffice in this situation).

    Also if you die then your deposit will be part of your estate. You need to make provision in your will for this i.e. let it remain invested in the house until your sister buys it or it it sold.

    You do not want your sister to be forced into selling the house because of the death of either your mother or yourself.

    Is your sister insured for sickness, accident or redundancy?

    What will happen if for some reason she can't pay her rent?
    Will your mother be able to manage the mortgage payments.

    With this arrangement you need to try and think of all the possibilities of bad things that might happen and make sure you are all proptected.
    For example - death, sickness, accident, redundancy, divorce, unwanted pregnancy, family fall out etc.
  • PalPal Forumite
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    An alternative would be to give the 15% deposit money to the sister as a gift and just ask her to pay it back at a later date. While you would not profit from any rise in the property price, you would also not lose out should the property price fall. It would also save having to fill out tax forms just to prove that you have not profited and so do not owe any tax.

    You could even agree a notional interest rate with her and get her to agree to leave the money to you in her will should the unexpected happen.

    This does, of course, rely on your maintaining a good relationship with your sister and her circumstances not changing as Lisyloo suggests.
  • Thank you all so much - what a complicated business!

    It sounds like my mum will have to buy outright - as lisyloo says she would effectively be applying for a 100% mortgage otherwise.

    If I cannot gift I will have to loan. Will I be able to offset my interest payments on my extra mortgage against tax on the income i get from the rent? As Rafter says, the rent I receive will not exceed my mortgage payments (though there will be some element of repayment as well as interest, and I understand that I wouldn't be able to count that against tax).

    My sister currently gets housing benefit to pay for about 80% of her rent, this would still be the case in the new flat (we have checked with a friend who works at housing benefit and there are no problems renting from family as long as the rent is a fair market rent.) If she were to lose her job etc I believe she would get 100% housing benefit (as long as the rent was fair). In fact she was advised by the council (off the record) to quit her job and then she could get full housing benefit etc and maybe a council flat too!!! :o

    My mum intends taking out an insurance policy against the value of the house falling. Am I being naive here but I don’t really think house prices will fall that far, particularly in the London area?? There is still a huge shortage of housing and a lot of people renting who would prefer to own.

    Thanks also for the considerations about wills etc... so much to think about ???

    i really appreciate your help, thank you so much guys :-*
    Nice to save.
  • PalPal Forumite
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    I do not believe you can insure against house prices falling, but would be very interested in finding out if it is possible!
  • paylesspayless Forumite
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    Some while back Halifax did offer a scheme that insured against neg equity and I have seen 1 commercially , but can nor recall deatils

    http://www.sundayherald.com/42942
    Any posts on here are for information and discussion purposes only and shouldn't be seen as (financial) advice.
  • Robert_Sterling_3Robert_Sterling_3 Forumite
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    Why does your sister not just rent accommodation?
    ...............................I have put my clock back....... Kcolc ym
  • Only the interest paid on a mortgage is offset against the income from rents. (thats why buy to letters always use interest only mortgages). Also, if you bought the house 85%/15%, your solicitor woul;d ask if you were buying as joint tenants or tenants in common. One of these would mean that if you or your mum died, that persons share automatically passes to the surviving relative, it does not get stuck in with the estate.

    why are you looking at selling again after 5 years?? If its in an area by a uni, then after your sister has finished, you can carry on renting it out, making yourself a tidy sum!!!!
    Buy a house with a few beds initially, and your sister can get a couple of her friends to live with her making you far more rent!!!

    Just an idea???
    Anything I write is based on my opinion only. Before acting upon any advice from anyone on a forum further professional advice should be sought.
  • BossybootsBossyboots Forumite
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    Your mum could buy the property with your 15% as a second mortgage. The main mortgagee will insist on being first so there is a risk here that if negative equity arises you will fall short.

    As you would not be an owner, you would not be liable for any capital gains later on. I am not sure how repayments are affected by tax though as you would clearly need a monthly return on the loan to pay your mortgage payments.

    Loaning the money direct to your sister without a loan agreement will leave it open to interpretation as a gift on which she could be liable to pay inheritance tax should something happen to you and your estate goes over the limit.

    It would be worth taking advice from an accountant or solicitor specialising in buy to let properties.
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