Buy to Let scenario - Advice needed.

TrebzUK

Hi everyone

My scenario and queries are below:

My partner lives in a rented council house and is now eligible for the right to buy scheme. Her house has been valued by the council and her father is wanting to give her the money in order to buy the house outright which will result in a 'No Mortgage' situation. The money will be paid back to the parent at £200 per month over time with lump sum re payments applied when possible. Their plan is to then let out the house to tenants using a local letting agency which will enable my partner to move in with me in another town.The house will be classed as a nest egg and investment for my partner upon retirement.

There have been concerns by all parties about the way the new Buy to Let laws will effect the potential to make a profit from the house and after some initial investigations I have found that she will not be majorly effected as:

1. My partner is not a High earner and is therefore not a high tax payer. She will earn less than 20K even with the rent income from the house.

2. My partner will own only one property.

3. There is no mortgage involved as it is a cash purchase.

My partner and her father still have concerns over the the monies involved which will be £56,000. Their further queries are:

1. What would be the best way to handle the £56,000, via a gift scenario or a loan which will be paid back to the parent. The latter is actually the case as my partner intends to pay these monies back at £200 per month as mentioned earlier.

2. How will stamp duty effect this scenario.

3. Will inheritance tax effect this scenario.

4. Will the purchase of the house and the transfer of the £56,000 be classed as an income for my partner for the financial year.

If you read between the lines we are in the same position as many other people, we simply don't know where to start. They have the Transfer Deeds from the council at hand ready to sign as they have come this far without understanding the potential pitfalls.

Thanks in advance for all advice given.

Marvel1

I can't answer the specific question but she should charge the same rent as the council did for her.

p00hsticks

TrebzUK wrote: »

Their plan is to then let out the house to tenants using a local letting agency which will enable my partner to move in with me in another town.

It will depend on the local council, but I thought that it was typical for conditions being imposed on the sale which would involve the discount having to be at least partially paid back if the buyer sells or lets out the property soon (within a few years) after buying with a right to buy discount.

GrumpyDil

p00hsticks wrote: »

It will depend on the local council, but I thought that it was typical for conditions being imposed on the sale which would involve the discount having to be at least partially paid back if the buyer sells or lets out the property soon (within a few years) after buying with a right to buy discount.

At least I hope so. OP if your partner does not really need the house why not move out and let someone else have the benefit?

Jenniefour

p00hsticks wrote: »

It will depend on the local council, but I thought that it was typical for conditions being imposed on the sale which would involve the discount having to be at least partially paid back if the buyer sells or lets out the property soon (within a few years) after buying with a right to buy discount.

Conditions are about selling on, not letting out, as OP describes.

Marvel1

Jenniefour wrote: »

Conditions are about selling on, not letting out, as OP describes.

Stupid government, they should change it so letting out also applies to the conditions.

Jenniefour

cjdavies wrote: »

Stupid government, they should change it so letting out also applies to the conditions.

I agree. There have been some opinions expressed about this very thing but not enough loud voices in the right places yet to force change in legislation.

Jenniefour

TrebzUK wrote: »

Hi everyone

There is no mortgage involved as it is a cash purchase. It's a purchase with a private mortgage, Dad is putting in the money and daughter is going to repay it. This means getting in a solicitors office to draw up correct documentation.


What would be the best way to handle the £56,000, via a gift scenario or a loan which will be paid back to the parent. The latter is actually the case as my partner intends to pay these monies back at £200 per month as mentioned earlier. As above. If it's given as a gift - which it could be - then Dad has no legal interest in the property at all and if there's any future problem e.g. falling out, then he doesn't have a leg to stand on legally re getting the money back. If Dad wants to he can give it as a gift, early inheritance as it were, but might cause family upsets if father is seen as favouring your partner after (or even before) he dies. And, if a gift, could run into deprivation of assets issues.

Will inheritance tax effect this scenario. Private mortgage set up properly. So the amount remaining, if private mortgage hasn't been fully paid back before fathers death, also forms part of the estate for inheritance tax purposes. You need to consider about how remaining the balance, in that scenario, would be repaid.
Will the purchase of the house and the transfer of the £56,000 be classed as an income for my partner for the financial year. No.

Just to let you know, OP, since you're new here, there are some strong opinions on here about right to buy!

theartfullodger

cjdavies wrote: »

I can't answer the specific question but she should charge the same rent as the council did for her.

Absolutely! If that rent has been fair for her, then anything extra would be unfair for her tenants:

Of course wouldn't be able to rent the place out for, I think, 5 years.

But with that huge bung from tax-payers under right2buy & the £56k from daddie she just might be abole to squeeze by....

Of course, with bresh*t it's looking like the bottom is going to fall out of the rental market & rents, and house prices:

Cheers!

00ec25

TrebzUK wrote: »

1. My partner is not a High earner and is therefore not a high tax payer. She will earn less than 20K even with the rent income from the house.

2. My partner will own only one property. so SDLT applies at the standard rate. That situation will of course change if, in time, you marry her, or she becomes a co-owner of your own (or another) property, in which case the higher rate SDLT will apply to her next property ownership

3. There is no mortgage involved as it is a cash purchase. yes there is, it's a loan from father

My partner and her father still have concerns over the the monies involved which will be £56,000. Their further queries are:

1. What would be the best way to handle the £56,000, via a gift scenario or a loan which will be paid back to the parent. The latter is actually the case as my partner intends to pay these monies back at £200 per month as mentioned earlier. so it is a loan, she cannot pretend it is a gift when very obviously it is not.

2. How will stamp duty effect this scenario. it will apply to the amount of money she pays the council to buy the property, that may or may not be above the SDLT standard rate threshold

3. Will inheritance tax effect this scenario. no,
IHT is payable when someone dies and their estate is above the IHT threshold. Father is not yet dead (or has she eyes on his money already?)

4. Will the purchase of the house and the transfer of the £56,000 be classed as an income for my partner for the financial year. no

Father needs to draw up a written loan agreement so that he has proof why he is in receipt of a regular sum of money (the repayment amount) for his own income tax purposes. The agreement must clearly state if the "£200" does, or does not, include any interest. If it does father has to pay income tax on the interest element.

When father dies (it will take 23 years to repay 56k @ £200/mnth) his will must address what happens to the outstanding loan. It is a debt to his estate and so the executors would call it in. That could mean she is forced to sell the house to meet the call if she does not have enough cash to repay the whole lump sum in one go. Is the loan to be written off on death? Is the loan to be repaid on death?

father needs to consider what would happen to the loan if he needs means tested benefits in the future since he has a lot of his money tied up in an investment that would impact his means assessment (quite rightly so, he is already taking advantage of the skewed RTB process so why should he "get away" with more taxpayer money)

and for the record there is no restriction at all on letting out the property you purchased as RTB from day 1 of your ownership. Sad but true, just read any council's website

Cakeguts

Good luck with finding good tenants who want to rent an ex council house from a private landlord. I hope your partner can afford to pay her father back the money when the tenants have stopped paying rent and wrecked the house? Good tenants often don't want to rent an ex council house when they can rent a house in a better area for not much more.