Selling to Children

timfoggo

I wonder if anyone could answer a legal/tax query about selling a house jointly owned by myself and my wife to our son, and his girlfriend.

We originally purchased the property (in late 2015) for our son and his girlfriend as they were unable to obtain the funds/mortgage to purchase at auction.

We agreed that we would sell them the property after 6 month or so of renovation work. The property although habitable needed significant renovation work.

We also agreed the resale price to them would be sufficient so we would not be out of pocket i.e. a price that covered all our initial purchase costs plus any running costs incurred since the purchase date - basically council tax and insurance. Likely to be around £190,000.

Over the past few months my son and his girlfriend have been renovating the property themselves. To date I believe they have spent upwards of £17,000 gutting the interior, replacing the roof, some floors and making good with new windows, kitchen, bathroom, rewiring etc.

If we assume that after all this work is completed (for say £20,000 excluding their labour costs) the property is valued at £250,000 could be sell the property to them for just £190,000?


They will need a mortgage to cover this agreed purchase price - all be it the agreed price rather than the probable market price.

Are there any tax implications we need to be aware of when selling property to children – capital gains, inheritance tax – or are we at liberty to sell at a lower than market price – factoring their input into the increased market value?

What would be the most tax efficient ways to handle this sale to our son and his girlfriend?

Hope that makes sense?

Thanks

marksoton

I have no knowledge of such things but would suggest you should ask this question prior to purchase in the future!

Best of luck.

kinger101

Oh dear, what a mess. You should have asked about the tax implications before you embarked on all of this. It's rather like asking for advice on contraception after sex.

For for purposes of CGT, the sale proceeds will be based on the open market value of the property as you're connected persons. The base price of the property will be the acquisition cost plus any enhancement expenditure. Some people will come on here soon and tell you repairs are not allowable for CGT, but that isn't the case. You just need to demonstrate that the expenditure is reflected in the state (and open market value) of the asset when it is sold. But of course, you didn't spend this money, so this makes things more complicated. It would minimize your CGT liability if you could get these costs transferred from your son to you.

Your son will have to pay SDLT when he buys the property.

I'd suggest you employ an accountant (who specializes in tax) for this because you already set about this in a way which is not at all tax efficient. It will be money well spent.

Doozergirl

Thinking back to when we bought our very first wreck, my H's parents were kind enough to buy it in cash in our names and allow us to remortgage it later and repay them. I'm not even sure how that would work these days!

I don't know how you deal with it now other than the way HMRC dictate. Open market value is subjective, though.

kinger101

If you can successfully argue that this is trade (as you intended to sell the property on) you might get it bought into income tax rules, which would get round the open market value for CGT rule. However, HMRC will probably argue it can't be trade without the profit motive.

For CGT you need to maximize base cost, and minimize what the "open market value" is. Your son's lender will no doubt match the value based on what your son offers (rather than say it's worth more), but HMRC might question it still if it hits their radar. If you can get the capital gain under £22,200, you're covered by 2 x CGT annual exemptions.

booksurr

you can sell it to your son and his GF for whatever price you agree on, be that 190 or anything else

you are liable for CGT as explained by Kinger. How much you need to pay depends on:
a) is it jointly owned with your wife. So each of you need to account for a share of the gain and each get a personal allowance against that share or is it in reality just you only who own it.
b) how much you can offset in costs as outlined by Kinger

for IHT if you sell it for less than the market value the difference between that and what you sell for is a "gift" for IHT purposes and falls under Potentially Exempt Transfer (PET) rules so you (eac) need to live for 7 years for your respective share value of the gift to no longer be included in your respective estates

the value of any gift will count as deprivation of assets if you need means tested benefits (ie care home fees)

the value of the gift will be classed as "gifted equity" for the purposes of your son's mortgage and may, or may not, impact on how much cash deposit he is required to have as different lenders view this differently given it is a sale between related persons