Buy a house for a friend?

Pixie5740

If your plan is to eventually sign the property over to your friend then a more tax efficient way of doing this would be to remortgage your own home and then use that money to set up a private mortgage with your friend. The friend would buy the property (avoiding additional SDLT), you'd have the 1st charge on the property (just in case friend defaults, paases away, gets married/divorced, whatever) to protect yourself, then once the private mortgage is paid off you can just remove the charge whereas if you owned the property and signed it over you could be hit with CGT.

Going down the private mortgage route would also avoid having to comply with all the landlord/letting legislation.

sleepyjones

Thanks tlc and Pixie for the replies.

We are still in the early stages so we haven't discussed much at all with the friends. It's a couple with a baby on the way, they could rent a similar property for the same amount, but we just happened to be in the pub and we were talking about stuff and how they wanted something long term to settle down with the new family, so our plan was just that instead of them giving someone else £500 a month (or whatever) then we would just buy get them the house they want and use all of the rent to pay off the mortgage earlier.

I think the plan is to hand them the house when it's done assuming they'll pay any relevant fees ... or at the very least go down to minimal rent (like £50 a month) once it's paid off We hadn't really taken into consideration Stamp Duty, Tax and all that kind of stuff.

We know they won't be able to get a mortgage, they can't even get credit checked for a letting agent so they're a bit stuck in Gumtree letting limbo (they've also got a dog, which makes it even harder to find a suitable property), hence we thought we get them exactly what they wanted.

There's so many thoughts going through my head, I kinda feel like I'm contradicting myself by over thinking things. Sorry about that. I'm waiting on a call back from an IFA to see exactly where we stand.
I'll let you know what the outcome is.

tlc678910

Is the reason for them not passing the letting agents credit checks something for you to be worried about? Was there a specific reason such as illness / redundancy for their credit to get in a mess or are you planning to buy a house specifically to be rented by people that don't manage their financial commitments generally?

Thrugelmir

sleepyjones wrote: »

It's not strictly a "Buy-to-let", as we won't be making a profit on it, anything they give us in "rent" will go straight to the mortgage,

The HMRC unsurprisingly has held a contrarian view from this for decades. The money you will receive will deemed to be rent. As such such will be taxable after allowable deductions are made.

Failure to declare same will result in considerable cost. As it's not just the tax you'll pay, but a penalty, interest and fines for not submitting self assessment returns. Nor is the HMRC restricted to six years either.

SavingSteve

JimmyTheWig wrote: »

Why not take the mortgage against your residential home? Then you won't need to worry about it being a buy-to-let mortgage, as you'll live there.
You can still offset the interest on this loan against rent payments in terms of income tax

You can do this? I thought the borrowing had to be against the property you made the income on? Can't find anything on HMRC that stays this is OK? Or am I missing it entirely? Really quite interested in the answer.

ViolaLass

SavingSteve wrote: »

You can do this? I thought the borrowing had to be against the property you made the income on? Can't find anything on HMRC that stays this is OK? Or am I missing it entirely? Really quite interested in the answer.

We've done this. What matters is why you've borrowed the money, not what you've borrowed it against.

sleepyjones

Wee update on this, The IFA didn't get back to us, so we're gonna contact someone else today.

@tlc ... There's a couple of reasons why they have failed the credit checks, I don't know too much about it 'cause I don't really want to pry in their private matters but I know they perhaps wouldn't pay a credit card bill, or a phone bill to ensure that their rent was paid, just stuff like that really (as far as I know). If we were to buy a house then it would bring their rent bill down and hopefully get them back on their feet.

As far as the signing it over thing is concerned, we had a wee chat about it over the weekend (me and the Mrs, not with them) and we think the plan is to try and buy the house at £60k, we'll charge £500 a month in rent and on the condition that they stay in the house, pay the rent for 15 years, we'll sign it over to them (and we'll give them a payment break/rent free every December so they can have a good Xmas)... meaning we'll take around £85k.
Still to discuss this with an IFA as far as tax, fees, Intrest etc ... exactly how much it will cost us overall to see where we stand with this.

Thrugelmir

sleepyjones wrote: »

we think the plan is to try and buy the house at £60k, we'll charge £500 a month in rent and on the condition that they stay in the house, pay the rent for 15 years, we'll sign it over to them (and we'll give them a payment break/rent free every December so they can have a good Xmas)... meaning we'll take around £85k.

You'll be out of pocket at that level.

sleepyjones

Yeah, possibly ... we're looking to get the mortgage paid off in about 7 or 8 years to cut down on the interest, but We'll find out exactly when we the get the IFA on the case.

beecher2

Remember to factor in costs of maintaining the property, and make sure you stress test using higher interest rates than at present. What interest rate are you basing paying off £60,000 in 7-8 years at £500/month as that doesn't seem to add up.