Releasing Equity from Parents Property, Guarantor or Property transfer?

atsweed

Hi All! I've been using these forums for year but have never actually used them. I have a reasonably complicated situation so this could belong in a number of topics!

Basically, my parents have recently split up and my Dad is currently living in the family home. He needs to raise £40k to 'pay off' my mum. The house is worth around £300k and has a mortgage of £20k. Unfortunately, he is near retirement and earns little so is unable to remortgage himself to raise the capital. I have a few ideas but unsure what would work. He only wants to keep the house for ~5 years before downsizing, in the hope the house will increase in value over that time.

I currently have two properties, one on a 75% LTV interest only mortgage which I rent out. The other is my main home and I have it on a 10% repayment mortgage. Both properties are on a fixed term ending next February and have increased in value such that the new LTVs will be around 70%. I earn decent money and have a good credit rating.

What I want to know is if there is any way I can help my Dad without wasting money on inheritance tax or capital gains tax, and ideally avoiding any income tax increase. My thoughts are:
1) He could give the house to me and I can remortgage it to raise the capital. I understand this could be an outright gift or a 'gift with benefits' where it still remains in his estate for inheritance purposes. He would be paying the mortgage (interest only or repayment?) so it would not count towards my outgoings but would i have to declare it as a cost when I remortgage? Would I have to charge him rent and pay tax on that?
2) I could be a mortgage guarantor? Ideally I would want to avoid his mortgage using my properties as security because it might scupper any chances of me getting a decent mortgage next Feb?
3) We could become 'joint owners' where I would own half the property and be liable for half the mortgage. I could feasibly argue that I use the house when I visit so want to own half the house to keep that privilege. I think I would need to own a larger share in the property to be responsible for a larger part of the mortgage as my dad is limited on what he could get.

I obviously want to avoid a hefty tax bill when the property is sold and my Dad downsizes. At that point I could also transfer any property back to him (or we could start looking at transferring it permanently and avoiding inheritance tax in the future?).

To make matters more complicated, I'm currently looking at ways to raise around £60k (either through a combination of loans and my mortgage next year) to renovate my main home. Could I raise this money from any of the options above and then significantly increase my home value before next years remortgages? I could then either take some capital out of my home to pay back some of my dads mortgage or leave both running at the same time? I can raise this capital without use of my dads property but I think that would be the cheapest way for me, as it would be on a favourable LTV. Any thoughts? Thanks a lot in advance for any help.

Cheers,

Alex

warby68

Well the obvious and far less convoluted is downsize now and dad lends you the cash if he has enough? The smaller house will still appreciate and be free of mortgage.

Loads of questions here though but first one is why is mum getting only £40k of a £300k house? Other assets? Or will she stay on the deeds and the money is just to get 'them' a 2nd property for her?

What is the 'real motive' here - sorry but it does sound a bit more like you're after mum and dad's property for your own purposes than just wanting to help dad.

Pixie5740

Indeed the most sensible and straightforward option would be for your parents to sell now and split the equity. Getting yourself involved in any of the ways you've listed above will not be as tax efficient as your parents just selling now. Doing it in one of your ways could lead to the payment of income tax, SDLT at the additional rate and Capital Gains Tax before you even get to IHT or POAT.

atsweed

Hi both. Thanks for your feedback. I agree selling now is the easiest thing but not what dad wants to do. In percentage terms a smaller property will go up the same (ish) but in real money the house would increase more, giving dad more for his twilight years. I don't need any cash from the deal as I can raise it myself so the main priority is helping dad keep the property. As far as I'm aware stamp duty isn't applicable to a gift? Also if I don't charge rent I avoid income tax? If he still lives there it counts as a gift with benefits or something so inheritance tax doesn't come into it. But I'm not sure if I'm picking the favorable outcomes from several different rules?

Pixie5740

Option 1: Income tax on the rent, doesn't matter what you want to call it, it will be rent. Then CGT when you dispose of the asset. You'll be gifted the property so your gain will be £300k (or whatever the market value when you dispose of it) minus £0. That's a £300k gain and assuming you're a higher rate tax payer you're looking at a bill of over £80k.

Option 2: no tax to pay. You'll have joint and several liability for the total debt but no legal right to the property.

Option 3. Higher rate of SDLT when you buy the property jointly with your father. CGT when you dispose of the property.

That's before you even get into IHT implications.

Thrugelmir

atsweed wrote: »

As far as I'm aware stamp duty isn't applicable to a gift?

But your father is receiving consideration for the transaction.

atsweed

Hi Pixie, thanks but that doesn't sound quite right. Capital gains is only payable on the increased value (ie when we sell it in 5 years) no? So if it goes up by £5k that would be the gain, this is regardless of whether it was a gift or not, it's based on market value. I was also under the impression stamp is only applicable when some consideration is considered, if I'm not paying for the property what is the consideration?

Hi Thrugelmr, likewise, what value would the stamp duty be applicable to?

Thanks both for your help.

Pixie5740

atsweed wrote: »

Hi Pixie, thanks but that doesn't sound quite right. Capital gains is only payable on the increased value (ie when we sell it in 5 years) no? So if it goes up by £5k that would be the gain, this is regardless of whether it was a gift or not, it's based on market value. I was also under the impression stamp is only applicable when some consideration is considered, if I'm not paying for the property what is the consideration?

Hi Thrugelmr, likewise, what value would the stamp duty be applicable to?

Thanks both for your help.

What do you think is incorrect about my calculation? CGT is indeed payable on the increased value. If you buy the house for £0 because it is gifted to you then your gain will be the market value when you dispose of it minus £0.

However, I note you are now saying when "we" sell it in 5 years time. Who is the we? You and your father? If your father gifts you the entire property there won't be a "we" but a "you" singular. Which scenario are you describing when you say "we"?

getmore4less

Gifted house, the acquisition value for future CGT is the market value at the time of the gift.

AnotherJoe

You mention options 1-3, how about option (4) where you loan him the money for 5 years, to be repaid when the house is sold in 5 years time, secured by a second charge on the property.

You can draw up a proper loan agreement via a solicitor, and assign whatever conditions you deem proper, for example you might get back the £40k plus an enhancement as a ratio of the property price increase or decrease.

eg if the house had increased by 10%, you get back £44k, if it dropped by 10% (your dad seems fixated on it increasing but the opposite is equally possible ) you'd get back £36k.

I think you'd be best to persuade him that a clean break now is best if you can but i dont see why this woudlnt work. You'll also have to consider how to enforce him selling, suppose if in 5 years he decides that house price inflation is just about to take off so he'd like to wait for another year ... and another year, etc. Would you take him to court?

atsweed

Hi getmore4less - Thanks for the clarification, that's what I was thinking.

AnohterJoe! Thanks for that also, exactly the kind of solution I was looking for. Agree house prices might also go down and have been through that with him. At the end of the day it is a gamble doing either (selling or keeping) especially with Brexit on the horizon. Thanks for your help.