Buying from parents - PLEASE HELP

My father-in-law has converted a barn and would now like to sell it to my wife and I. We cannot afford the full price of the property (£450,000) and my father-in-law needs to make some money on the sale so we would like to buy 50% with father-in-law retaining the other 50%. Would we be able to get a mortgage for 50% of a property? Affordability wouldn't be an issue as we'll have a £60k deposit from the sale of our current house meaning the mortgage would actually be less than we are paying for our current house.

As I understand it, my father in law cannot sell us the whole property for a discounted price as the capital gains tax he would incur from doing that would wipe out any money made.

Any advice would be very gratefully received

Chris
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  • My father-in-law has converted a barn and would now like to sell it to my wife and I. We cannot afford the full price of the property (£450,000) and my father-in-law needs to make some money on the sale so we would like to buy 50% with father-in-law retaining the other 50%. Would we be able to get a mortgage for 50% of a property?

    No. The mortgage company would never have this.
  • My thoughts exactly. Any alternatives?
  • AnotherJoeAnotherJoe Forumite
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    My thoughts exactly. Any alternatives?

    You buy it for half price, and father gives you a loan for the other half at the same time.

    The loan is written such that no repayments are required until the house is sold*, at which point, it is repaid with an increase in proportion to the rise in value of the house (or decrease). Father therefore gains from house price appreciation in the same way as if he owned half of it.

    The loan agreement will be properly witnessed and done by the solicitor, who will also put a second charge against the house in the LR (so that you can't quietly sell it, pocket the proceeds and run off with the loot :eek: )

    As a side-effect, you get an excellent mortgage rate as the LTV is 50%.

    Father also amends his will such that this loan is taken into account when the estate is settled up amongst any other recipients.

    Not all lenders will be OK with this, but at least two lenders will do this (from personal experience having done this), Santander and Nationwide.

    * Obviously father cannot get hold of his money until you sell (or you buy him out) , so he needs to be prepared to wait, and perhaps you might also write in an agreed 'long-stop' date of sale, lets say in 10 or 20 years time, whatever, at which point you agree to sell (or pay over the half value of the house) if he wishes.
  • booksurrbooksurr
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    CGT
    He will be liable for Capital Gains Tax on whatever % of the property he transfers into your name assuming he does not and has never lived in the barn as his main/only home. The value used will be its full market value x % "disposed of" to you. If you buy 50% then he will be taxed on 50% of the gain, there is no escaping that if it was not his main/only home.

    Mortgage
    The lender would require father to be party to the mortgage if father retains any ownership of the property. Father may or may not pass affordability checks in his own name, so may or may not scupper the deal.


    Alternatives
    As posted by another joe.
  • Thanks- this was our original plan but it has been scuppered somewhat by the capital gains tax my father would incur as he had budgeted for CGT to be calculated based on the reduced sale price and not the actual value. Using the actual value means that once bills are paid he would end up losing money. He never wanted to make a huge profit, but does need to at least cover his costs!
  • Yeah unfortunately due to his own fairly large mortgage and his age, he wouldn't pass affordability to be on the mortgage too
  • If you do find a way to do this - bear in mind that the necessity is just as great as it normally is for housing like this to have details re the Right of Way to the house down there specified in writing:

    - "at all times for all purposes"

    - what width the ROW is

    - what the exact arrangements are for maintenance costs of the ROW. Would the house contribute towards these? What percentage? How are decisions to be made re that maintenance work?

    After all - you personally may not be bothered/may always stay on good terms with him - BUT that house is going to be sold on at some future point to a stranger in years to come and that stranger will need everything laid down/precisely/in writing.
  • Struggling to see how father would lose money. On phone so can't run through full calculation but suspect there is a misunderstanding of how CGT works
  • edited 1 December 2016 at 9:30AM
    booksurrbooksurr
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    edited 1 December 2016 at 9:30AM
    given what you have posted so far you probably do not understand how CGT works, crucially the difference between the amount liable ("taxable gain") and the amount payable ("tax paid")?

    is father's objective to come out of the deal with a "profit" or simply to have covered any costs incurred in doing the conversion and tax he owes?

    Hypothetical example:

    1. Father lives on a farm, it has a barn. The original cost of the barn as a separate building is unknown because it formed part of the whole farm and was not bought as a discrete building on its own. Father employs a professional valuer to work out the "original cost" of the barn, let us call that (*?)

    2. Father spends £60,000 on converting barn to residential building

    3. Father wants to let you take ownership. Market value of converted barn now £450,000. Father thus has a "gross gain" of 450,000 - 60,000 - (*?) original cost (1 above) = 390,000

    4. father disposes of 50% interest in the barn to you. Father's CGT liability therefore: 390,000 x 50% = 195,000 - personal allowance 11,100 = 183,900 taxable gain

    5. The worst possible case for CGT is all payable at 28%. Father's tax bill payable in that case 183,900 x 28% = £51,492

    6. How much cash actually passes between you and father is nothing to do with the tax bill. You will be the legal owner of 50% of the barn, if father's objective is:
    a) cover works cost + tax: you need to pay him 60,000 + 51,492 = 111,492 and for that you get 50% of a barn worth £450,000.
    b) cover tax and forget about works cost: you pay him 51,492 and for that you get 50% of a barn worth £450,000

    if all father wants is his tax bill covered, then per the example above, you already have 60,000 deposit in cash to start with, so would not need to borrow any money at all to do the deal... at which point the "problem" caused by the fact you cannot get a loan where father must be party to it because of his retained 50% ownership disappears

    per your OP it all comes back to what exactly you mean when you say "father needs to make some money on the deal"??

    Why does he want to retain 50%, he cannot get at that unless you sell so what use is it to him? Why not let him make you 100% owner then you can get a mortgage as normal and pay him whatever he "needs"
  • TBagpussTBagpuss Forumite
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    The way to do it would be for the property to be transferred to you and for you to pay him the 50%.

    You would then grant a second charge over the property to your dad (the first charge being your mortgage) to secure the second half of the money. This could be done in one of two ways.
    1. Like a normal mortgage, for 50% of the current value + interest (and you will need to agree with your dad about whether you are going to be making regualr paymentsd to him or whether it will be 'rollled up' tp a later date) OR
    2. For a fixed % of the value ofthe property, payable wehen the proeprty is sold. In this case his charge would be for 50% of the value so he would in effect be investing his money in the property and would get 50% of any increase in value between nowand when you sell.

    In each case, the debt to your dad would rank 2nd after your mortgage. It can be registered at the LAnd registery as a formal charge which protects him.

    Your dad would have to get some advice about the tax implications - I think that he would have to declare the interest as income for tax purposes, if you go down the second route I am not sure whether the difference between curent value and value when the debt is repad would be classed as a capital gain or as income.

    You could of course buy a different % to adjust the amount he is lending, and could include provisions for you to pay lump sums off the debt by agreement if you wanted to.
    All posts are my personal opinion, not formal advice Always get proper, professional advice (particularly about anything legal!)
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