Advice please - looking to buy a house with annexe for retired parents

Luckygirl19

Hi all,
I am aware this topic has been covered in other threads (I have scoured them all!) but I am hoping for some helpful, considered advice on what we need to consider/investigate further.
My partner and I rent, we have no mortgage but good incomes; we understand from our financial advisor that getting a mortgage should be no issue. Our parents (in their 70s) own their house completely, they are both still active and able to drive etc. 
We are looking to buy a house 50/50, with half the value coming from our mortgage (say 250k) and half the value coming from the sale of their existing home.We would live in the main home, with an annexe/separate self-contained living area for our parents.
Please can someone help me with what we need to be investigating... how should we split the deeds, would a mortgage company be interested if they only have a 50% share (which would effectively be the whole mortgage), how does this affect Inheritance Tax and prospective care fees etc?
We want to do everything legally and above board, but we dont want either party to stumble into an intentional hole without meaning to! There are no other siblings, their estate (if any) will pass to us in the longterm.
Thank you in advance!
Jacquie

jamesbt

Your mortgage adviser may be able to put you in touch with a financial planner that will be able to give you proper advice but as far as I am aware you should look out for the following:
1. How big is the self-contained living area? If it's is deemed to amount to at least 1/3rd of the value of the whole property, it could be classed as a separate property and will attract an additional 3% stamp duty on that part. If this is the case, buy them separately; the main house in your name and the annex in your parents name. Both bits will get the first £125k at 0% stamp duty (more at the moment).
2. If your parents current home is worth £375 or more and they have total assets of less than £1m then you shouldn't have to pay any inheritance tax when they both pass away. The residence nil rat band for inheritance tax will remain intact even though their share of the new property is valued under £375k.
3. If the property is purchased as one then you can own it as joint tenants (all four of you have equal share), or as tenants in common (specify who own's what percentage). The former should avoid any inheritance tax issues but the latter may result in an inheritance tax liability depending on how the shares are distributed and how much money your parents contribute to the purchase. The former would also mean that you and your partner would have to update your wills whilst you aren't married or in a civil partnership.
4. The mortgage company may be OK with you and your partner being the only two on the mortgage but I think that they will need written confirmation from your parents that they are give up and rights to the property if the debt falls in to arrears. Your mortgage guy will know this better than me.
I'm not a professional adviser, I just have an interest in this sort of stuff. A financial planner will know all the answers and it might be a good idea for your parents to look into getting one. It should only cost around £500 but may save a load of problems around this house purchase and around future inheritance tax. 

greatcrested

First problem is joint ownership means joint mortgage and owners in their 70s will struggle (hard!) to get a mortgage.

No a lender will not lend on 50% ownership. How would they repossess and sell if you ran up mortgage arrears?

Do you plan to look for a house with an annexe, or buy a house and build one? Either way, be aware of separate council tax rules - use duckduckgo "annexe council tax".

If you DO buy jointly, as Tenants In Common, your parents will should specify who inherits their share(s). If not you, how will you feel sharing ownership with.... whoever it is. What if you, or they, want to sell?

Their share will of course be subject to Inheritance Tax, based on the value at time of (presumably) 2nd death. What if the IHT cannot be paid without selling the property? Do they have other assets/investments etc?

Alternative is for them to either gift or loan you the money, and you fully own and get a mortgage in your sole names.

That has downsides for them as it leaves them vulnerable having no rights to the property. What if you got divorced? What if you lost your job? Became seriously ill? What if....?  You might have to sell leaving them homeless.

If it was a loan, they could place a Charge on the property (well, 2nd Charge after the mortgage) to protect their loan.

If a gift, the amount (decreasing) would remain in their Estate for IHT for 7 years.

Care Home funding: I think whether it was a loan or gift the LA would include it when asessing their eligibility for LA funds (dduckduckgo "Deprivation of Assets").

Luckygirl19

jamesbt said:

Your mortgage adviser may be able to put you in touch with a financial planner that will be able to give you proper advice but as far as I am aware you should look out for the following:
1. How big is the self-contained living area? If it's is deemed to amount to at least 1/3rd of the value of the whole property, it could be classed as a separate property and will attract an additional 3% stamp duty on that part. If this is the case, buy them separately; the main house in your name and the annex in your parents name. Both bits will get the first £125k at 0% stamp duty (more at the moment).
2. If your parents current home is worth £375 or more and they have total assets of less than £1m then you shouldn't have to pay any inheritance tax when they both pass away. The residence nil rat band for inheritance tax will remain intact even though their share of the new property is valued under £375k.
3. If the property is purchased as one then you can own it as joint tenants (all four of you have equal share), or as tenants in common (specify who own's what percentage). The former should avoid any inheritance tax issues but the latter may result in an inheritance tax liability depending on how the shares are distributed and how much money your parents contribute to the purchase. The former would also mean that you and your partner would have to update your wills whilst you aren't married or in a civil partnership.
4. The mortgage company may be OK with you and your partner being the only two on the mortgage but I think that they will need written confirmation from your parents that they are give up and rights to the property if the debt falls in to arrears. Your mortgage guy will know this better than me.
I'm not a professional adviser, I just have an interest in this sort of stuff. A financial planner will know all the answers and it might be a good idea for your parents to look into getting one. It should only cost around £500 but may save a load of problems around this house purchase and around future inheritance tax. 

Thank you James - this helps us a lot. We hadnt even considered the option of buying the house for us and our parents buying the annexe - that could be a genuine solution. we would need to look into the details of how that would be done - would the current sellers be willing to sell in two parts, as long we covered the additional legal fees. We are definitely going to get professional advice - but even that is a minefield! Knowing the kinds of questions to ask, and potential pitfalls, is invaluable. Thank you for your help!

AdrianC

You don't mention having any savings at all... So effectively you'd be after a 100% mortgage if you could split the title into two?

Luckygirl19

greatcrested said:

First problem is joint ownership means joint mortgage and owners in their 70s will struggle (hard!) to get a mortgage.

No a lender will not lend on 50% ownership. How would they repossess and sell if you ran up mortgage arrears?

Do you plan to look for a house with an annexe, or buy a house and build one? Either way, be aware of separate council tax rules - use duckduckgo "annexe council tax".

If you DO buy jointly, as Tenants In Common, your parents will should specify who inherits their share(s). If not you, how will you feel sharing ownership with.... whoever it is. What if you, or they, want to sell?

Their share will of course be subject to Inheritance Tax, based on the value at time of (presumably) 2nd death. What if the IHT cannot be paid without selling the property? Do they have other assets/investments etc?

Alternative is for them to either gift or loan you the money, and you fully own and get a mortgage in your sole names.

That has downsides for them as it leaves them vulnerable having no rights to the property. What if you got divorced? What if you lost your job? Became seriously ill? What if....?  You might have to sell leaving them homeless.

If it was a loan, they could place a Charge on the property (well, 2nd Charge after the mortgage) to protect their loan.

If a gift, the amount (decreasing) would remain in their Estate for IHT for 7 years.

Care Home funding: I think whether it was a loan or gift the LA would include it when asessing their eligibility for LA funds (dduckduckgo "Deprivation of Assets").

Hi GreatCrested - thank you for your valued input, it has given us some new ideas which we didnt know of previously. Presumably with a "charge"  for our parents (or 2nd charge, after the mortgage) the mortgage company would be much happier as they get first dibs on any clawback. To give more detail, the house would be approximately 500k, therefore the mortgage would be 50% of this. Even with significant depreciation, I cant see the house losing more than 50% value (it's rural, on a National Park and in high demand - we are expecting to add value simply by refurbishing, though the intent would of course be to keep it as our permanent home for the longterm future. My husband and I would be making the investments in the redecoration. If we went down the loan route, I assume we would also have to consider loan repayments - I wonder whether there is a "legal expected minimum" so they could simply say "£100 per month" - and would our parents be happy with an unsecured loan. Our prime concern is that this does not in any way detrimentally affect our parents - their prime concern is to live near/with us into their old age and have quality of family life. there are so many considerations, but having this level of detail will really help us with our meeting with the Financial Advisor. Thank you for your help!

Luckygirl19

AdrianC said:

You don't mention having any savings at all... So effectively you'd be after a 100% mortgage if you could split the title into two?

Hi Adrian, we have about £15,000 savings, so our LTV would potential be around 95% - however our parents are considering gifting the amount needed to make up the shortfall, so we would have an LTV of approximately 80%. The gift would of course be subject to the 7yr inheritance tax rule. Thank you for your comment, I re-read my original post and hadnt made this clear!

AdrianC

Luckygirl19 said:
Presumably with a "charge"  for our parents (or 2nd charge, after the mortgage) the mortgage company would be much happier as they get first dibs on any clawback. To give more detail, the house would be approximately 500k, therefore the mortgage would be 50% of this.

No, it doesn't work like that...

You and the parents would jointly own 100% of the £500k property.
A £250k mortgage against it can't be secured against 50% of it - it would need to be secured against 100% of it, which means that all owners (usually) need to be joint borrowers.

A charge against it is when a non-owner says "I am due £x from any sale". Your parents would be joint owners, so they can't have a charge.

Luckygirl19 said:

Hi Adrian, we have about £15,000 savings, so our LTV would potential be around 95% - however our parents are considering gifting the amount needed to make up the shortfall, so we would have an LTV of approximately 80%.

If they're joint owners, then the £250k they're putting in means 50% LtV - and it's not gifted to you, because they're spending their £250k on buying the property they jointly own...

Either...

You + Parents jointly own, and all are borrowers.
...or...
You buy solely, with £250k 50% LtV mortgage and £250k gifted equity from them.

The latter makes borrowing simpler, but there may well be other issues surrounding the gift, not least deprivation of assets for if they need care. And please don't say "But I never would..." if you've never seen somebody in late-stage dementia, for instance.

onwards&upwards

I can't see why you want to do this?  What is the motivation? 

Do you and your parents both really want to give up your privacy and be in each other's pockets potentially for 20 or more years? 

You really need to consider every possible potential outcome:
Your parents separate
You and your husband separate
One or both of your parents needs care beyond what you can provide
You or your husband lose your jobs, or become ill or disabled and unable to work, or one or both of you dies. 
You have children (how many, what if they have disabilities or additional needs?)
You need to downsize, or move to another part of the country or the world. 
The house needs substantial work

Luckygirl19

AdrianC said:

Either...

You + Parents jointly own, and all are borrowers.
...or...
You buy solely, with £250k 50% LtV mortgage and £250k gifted equity from them.

The latter makes borrowing simpler, but there may well be other issues surrounding the gift, not least deprivation of assets for if they need care. And please don't say "But I never would..." if you've never seen somebody in late-stage dementia, for instance.

Thank you Adrian - I see the logic now in them also being on the mortgage, this settles the concerns about ownership. 
Ref the "gift" option and us owning completely, I understand from research that this would not work as our parents would still be benefiting from their gift, therefore it is not a gift and would still (rightly) class as their estate. 
It's such a lot to consider, which was exactly my reason for asking - I appreciate all your input!

Luckygirl19

onwards&upwards said:

I can't see why you want to do this?  What is the motivation? 
Do you and your parents both really want to give up your privacy and be in each other's pockets potentially for 20 or more years? 

Hi onwards&upwards, thank you for your comment.
The reason for doing this is twofold:
a) to be near our loved ones so we are able to provide care 9as far as we are able) as they progress into old age
b) to enable us to buy a house with them as a home for the longterm future
I believe this kind of scenario is becoming more popular in the UK, especially with multi-age residency... I even believe it is being encouraged byb the government in some cases, to help with the lack of housing and care facilties