Bank of Mum and Dad

Crink

I want to buy my daughter a house since she would have difficulty getting a mortgage (self employed). BUT, if I buy it I presume I would pay 3% stamp duty since I have a main residence. Therefore I think I should give her or loan her the money. She then buys the house.

However, I would wish to be co-owner (tenants in common) so that, when I die, my share is divided between her and her siblings. On the basis that if she pays rent each month, she is effectively repaying the loan and buying quity in the property so my share diminishes over time.

Does this work? Can anyone see any catches?

Many thanks
Crink

kinger101

Many.

Stamp duty - if you have any beneficial ownership of the property, you will pay the higher rates.

Income tax - you used the word "rent". You need to pay income tax on profit form property rental. Similarly, if you charge her interest on the loan, this is taxable.

CGT - if you decide to sell the house while you're alive, you won't be entitled to any private residence relief (on the share you retain ownership of)

IHT - difficult to advise as it's not 100% clear what you're doing. If you make any gifts (without reservation), then they are potentially exempt from IHT if you survice seven years. If you did within the seven years, your estate or your daugther will pay (you should make this clear in the will). If it's a gift with reservation (i.e., collecting rent or right to live in a property) then it remains part of your estate.

If you help children buy property, either;

(a) give them money outright; or
(b) provide them with an interest-free loan

If you can't loan them the full amount, the lender may reduce the amount they're willing to lend, unless the repayment plan doesn't interfere with the affordability (e.g., paid back only when house is sold, but bank retains primary security on property). You'll need to speak a mortgage broker to determine what will keep a bank happy.

Whatever you do, don't buy a home for your daughter which you own. It's very bad tax planning.

Crink

Thank you so much for this useful advice. If I go for option (b) - interest free loan, then I presume her name is on the title to the house but she has a private arrangement with me to repay the money. As it is a loan repayment, would I avoid income tax? I presume that, in the event of my death, the un-repaid part of the loan would form part of my estate? Is that correct? Who could advise me on this?
Thank you again

kinger101

Crink wrote: »

Thank you so much for this useful advice. If I go for option (b) - interest free loan, then I presume her name is on the title to the house but she has a private arrangement with me to repay the money. As it is a loan repayment, would I avoid income tax? I presume that, in the event of my death, the un-repaid part of the loan would form part of my estate? Is that correct? Who could advise me on this?
Thank you again

There' no tax to pay on an interest free loan, as it doesn't generate any profit. The unpaid balance would remain part of the estate, but I think you'll need to speak to a solicitor to determine what plan will be in place for your daughter to repay if this happens.

Bluebirdman_of_Alcathays

Are you wishing to loan the full property price? Or will a bank have to fund part?

AnotherJoe

What I've done, in a similar circumstance, is to have my will reflect this.

So when I peg it, using made up numbers for ease of use, let's say daughters house is worth £100k at the time of death, and my estate 500k, and there are two other siblings.

Total value of "estate " is calculated as £600k (my estate plus value of daughters house) so each sibling is due £200k. But since the one with the house already has £100k as value of the house , the two other siblings get £200k cash each from sale of my estate and the sibling in her house gets £100k cash.

xylophone

I wonder could it work like this.

You have a formal interest free loan agreement drawn up by your solicitor and take a first charge on the property.

The agreement requires your daughter to repay the capital by realistic monthly instalments.

You gift this money in equal shares to her siblings each month, keeping a careful record of each repayment.

In your will, you leave the benefit of the first charge/ repayments (if any, by then) to her siblings.

AnotherJoe

That means that the daughter gets the whole benefit of the appreciation in price of the house.

xylophone

That means that the daughter gets the whole benefit of the appreciation in price of the house.

But I wonder if this is of paramount importance to the OP since it seems that by enabling her daughter to purchase a property with an interest free loan, she is anyway "favouring" that child?


Using the method I suggested, all the children would be gaining some benefit straightaway ( and the siblings can invest the gifts) and the OP would be making regular gifts from income which might be of benefit from the IHT perspective?

AnotherJoe

Good point. The OP has choice now.

Crink

Thanks for the question Bluebirdman. I would aim to make her a cash buyer, so it may be that she can raise 20% of the house purchase and I would lend (or donate) 80%, so idea is no mortgage is required.