Mortgage coming to an end, too old to get new finance, wants to transfer property to kids

confused_landlord

Asking for my sister.
Basically, their BTL mortgage term is coming to an end, and my sister's husband is too old to get new finance. They really want to transfer the property to their kids as the kids are now earning well and can take over the mortgage. It appears from other posts on this site that CGT is payable on a gift transfer. My questions:

So what is the benefit of the 'staying alive for 7 years' after gifting rule?
Can they not give the kids their inheritance now, instead of later? The transfer is below the Inheritance Tax threshold.
Would they be allowed to transfer the mortgage to the children?

Any advice would be much appreciated.

Thanks in advance

Savvy_Sue

I don't know very much about CGT, but I know it's not the same as Inheritance Tax (IHT). And I know that CGT is due if you sell a property which has not been your primary residence, and I think that would apply even if no money changed hands. 

What I do know: the 'staying alive for 7 years' rule relates to IHT. There are certain exceptions, but if you give money or assets away then theoretically that reduces the size of your estate (what you're worth when you die), except that if you die within 7 years of those gifts, part of it is counted as still being within your estate - it's a sliding scale. 

So yes, they can give the kids whatever they like, whenever they like, BUT there may be tax implications. If their estate - especially the estate of whichever of them dies first - is over the limit for IHT, then it's worth getting specialist advice. It may well be that the first estate won't be liable to pay IHT, but it could be worth getting that advice now, because the survivor might not be in the right frame of mind to act on any advice in a timely fashion. Always worth pointing out that anything which goes direct to the spouse is NOT liable for IHT, but either leaving or having gifted a property to the children takes it outside those provisions. 

The other consideration is Deliberate Deprivation of Assets (DDA). If you give away a lot of your assets, but then need residential care or help at home from the local authority, then they will do a means test, and this will consider whether you've given money or assets away in order to reduce your liability to pay for your care. This doesn't have a 7 year rule: in theory the local authority can go way back, so the question is whether AT THE TIME YOU GAVE THESE ASSETS AWAY was it foreseeable that you would need care in the future? If your sister and BIL are in good health, with no life-limiting or restricting illnesses, then great. If either of them are already unwell, they should hang on to their assets in order to provide for themselves in their old age and infirmity - unless their children are willing to use their advance inheritance to do so. 

Transferring the mortgage to the children: no, you can't do this, especially as it's coming to a natural end anyway. IF the children wish to take on responsibility for the property, AND their parents wish to pass the property over to their ownership, THEN the children can apply for their own mortgage. But you'll notice IF AND THEN - do the children (any or all of them) want to take on responsibility for being landlords? If they do, what would be the best way of doing this? There are all sorts of implications: tax, legal, personal.

The personal implications: let's suppose there are three happily married children, but one loses their job, their spouse doesn't work, and they have to claim means tested benefits. Their share of this house will be included in their assets, and they won't be able to claim. Or let's suppose one of those happily married couples suddenly isn't, and divorce is on the cards. Their share of this house will be included in their assets, and will affect the final divorce settlement. Or let's suppose that these three children are all happy to take their share of the rent, but they disagree over how much should be spent on maintenance, and who does it, and one of them ends up spending every weekend sorting things out at this house and finds it very unfair they are only getting 1/3 of the rent. And so on. 

It seems to me that the simplest solution would be for your sister and her husband to sell the property and pay off the mortgage. If they then decide to share their largesse with their children, then the children can decide what to do with it. They could even offer to sell the property to one of more of the children IF THEY ARE INTERESTED. 

But I'd say your sister and BIL definitely need some good advice on the best thing for THEM to do. And I'd include in that getting good advice from a broker over whether there are lenders who WOULD give a mortgage. I know it used to be impossible over a certain age, but I believe eg Nationwide are now prepared to include pensions as income (which is good, because it's a lot more reliable that a salary these days!) and to lend to older people. Whether that extends to BTL mortgages I couldn't say, and of course that depends on whether THEY would, if possible, like to retain the property. If they don't want the continued hassle, then as I said, sell it. 

MovingForwards

Has your sister spoken with a good mortgage broker about remortgaging the BTL? 
One of the brokers who posts on MSE has older clients and it would be worth dropping him a message.

CGT will be a huge concern, especially as it's a rental. It would be worth asking on the tax sub-forum.

Better still would be your sister posting as she can provide a lot more information when asked as there's a lot needed for anyone to be able to give any indication as what options to consider.

Keep_pedalling

As their estate is under the IHT threshold there is no point in doing this for tax reasons and the 7 year rule is not worth worrying about. 

Apart from where is the money coming from to pay the CGT bill  that will have to be paid within 3 months of the transfer, this could be a terrible idea for several reasons. If any of the children do not already own their own home this will take away their first time buyer status so they will be hit buy additional stamp duty when they do come to buy somewhere. This could cause all sorts of issues if one of them wanted or needed to sell and the others wanted to keep it.

Can you sister manage without the rental income? Do her children really want to be forced into becoming accidental landlords?

Gifting can be good, but it should be without strings and not come with the need to borrow money 

Savvy_Sue

Keep_pedalling said:

As their estate is under the IHT threshold there is no point in doing this for tax reasons and the 7 year rule is not worth worrying about. 

I wasn't 100% convinced that the whole estate would be under IHT levels. What the OP said was: 

Can they not give the kids their inheritance now, instead of later? The transfer is below the Inheritance Tax threshold.

Given that they didn't seem to have a lot of understanding of the various taxes which MIGHT be due, and given that there are at least two properties in the eventual estate, it seems to me that it would be unwise to assume anything. They seemed to be suggesting that the parents would transfer a gift below the IHT threshold, but before death. 

We are in absolute agreement about how terrible an idea this might be. :-)

Keep_pedalling

Savvy_Sue said:

Keep_pedalling said:

As their estate is under the IHT threshold there is no point in doing this for tax reasons and the 7 year rule is not worth worrying about. 

I wasn't 100% convinced that the whole estate would be under IHT levels. What the OP said was: 

Can they not give the kids their inheritance now, instead of later? The transfer is below the Inheritance Tax threshold.

Given that they didn't seem to have a lot of understanding of the various taxes which MIGHT be due, and given that there are at least two properties in the eventual estate, it seems to me that it would be unwise to assume anything. They seemed to be suggesting that the parents would transfer a gift below the IHT threshold, but before death. 

We are in absolute agreement about how terrible an idea this might be. :-)

I missed that, thanks, although if there estate is over £1M why the need for a mortgage?  Larification required.

MalMonroe

"my sister's husband is too old to get new finance" - really? 

Sorry but I've just turned 70 myself and am still looking to get a joint 15 year mortgage. I don't ever want people to tell me that I'm too old to do anything, let alone get new finance. 

confused_landlord

MalMonroe said:

"my sister's husband is too old to get new finance" - really? 

Sorry but I've just turned 70 myself and am still looking to get a joint 15 year mortgage. I don't ever want people to tell me that I'm too old to do anything, let alone get new finance. 

I guess it depends on your financial situation. My Bil might have to retire so his finances will take a hit. 

helensbiggestfan

Age is not a barrier to getting a mortgage, as long as the income is sufficient.  

You might need a specialist broker rather than a high street lender.  

[Deleted User]

You can gift somebody £3000 in any one year, above that if you die within 7 years then its counted for IHT.