Tax implications of buying parents house below market value

polymooger

I've read a few guides on this but can't quite zero in on the answer - perhaps someone can help me please. I'm thinking of buying my parents' house and renting it back to them under an assured shorthold tenancy so they can continue to live there as they can no longer afford their mortgage and can't get another. I have my own primary residence elsewhere.

They bought the property for £155K

Current value £110K

Mortgage outstanding £89K

If I buy the property on a regulated BTL mortgage for £89K thus clearing their debt will I or they be liable for any taxes beyond SDLT? I know I'll have to pay stamp duty on the 89K as it will be an additional property for me.
Is the difference in purchase price and value a material consideration in this particular case, either at purchase or in future if I eventually sell it? I've seen mention of IT and CGT but can't be sure whether these are relevant at the values concerned.
Anything else tax-wise to consider? I know I'll be liable for income tax on the rental income.
Thanks for any advice!

AdrianC

SDLT will be assessed on the full market value, since it's a transaction below market value between connected persons (close family members).

The £21k will be viewed as a gift by HMRC for IHT if they die in the next seven years and their estate is large enough (which is unlikely), and as having deprived themselves of assets by the local authority if they need care funding.

On the upside, any eventual CGT liability will also be viewed as starting off at full market value...

Your BtL lender is unlikely to want to know about close family members as tenants, and you need to investigate the sale-and-rent-back issue.

It would be a lot easier if you could obtain the money elsewhere, and lend it to them to clear their mortgage, then you place a charge on the property for the debt.

2bFrank

If you are renting it out you will be liable for CGT on the profit you sell the house for. so if you are buying it for £89k then in the future sell it for £155k the you will be liable for the difference (£66k), however there are rules regarding buying of family members that can make you liable for the full sale value, that you might need to look into.

Inheritance I wouldn't worry about if thats the amount of assets they have, as it will be under the limits (unless there is a drastic change).

You will pay extra stamp duty as it will be an additional home (be roughly in the £2,600 mark roughly give or take).

Deprivation of assets will be your biggest issue if your parents have to go into care. However this will be only the difference of the current value and outstanding mortgage (£21k). This would put them over the £14,250 allowed in assets but below the £23,250 (presuming the have no other savings or assets).  So they or you will be expected to make some, but not all contribution towards their care. However if they are healthy and well and care looks a long way off then this might not be an issue.

Who will be paying the rent will it be your parents income or will they be claiming benefits for the rent. If they are claiming benefits, then you are going to run into issues as there are rules regarding paying rent to family members on benefits. You will need to look into this further.

Slithery

Tax isn't your biggest issue, the fact that it would be illegal unless you are registered with the FCA for 'sale and rent back' is...

https://forums.moneysavingexpert.com/discussion/comment/77559111/#Comment_77559111

polymooger

Slithery said:

Tax isn't your biggest issue, the fact that it would be illegal unless you are registered with the FCA for 'sale and rent back' is...

https://forums.moneysavingexpert.com/discussion/comment/77559111/#Comment_77559111

From another thread, with my bold: 
"In August 2011 HM Treasury introduced new sale and rent back regulation requiring anybody purchasing a property under a SRB scheme to be authorised by the FSA, unless the buyers and sellers are family members."

Is that no longer the case?

SpiderLegs

AdrianC said:

SDLT will be assessed on the full market value, since it's a transaction below market value between connected persons (close family members).

That’s very interesting. Thanks for providing this info.
👍

polymooger

AdrianC said:

SDLT will be assessed on the full market value, since it's a transaction below market value between connected persons (close family members).

What happned to SDLT being based on the 'consideration' i.e purchase price, rather than FMV? Is that principle overridden by the fact it's between family members?

Thanks for your other observations, appreciated.

As a general point I'm not trying to do this because I think it's a brilliant idea, I'm just trying to help my folks out and it seems to be the least-worst idea when all the alternatives and factors are weighed.

Cheers

Annisele

If there's any way for you to get hold of the £89k without securing the borrowing on your parent's house, it's probably better for your whole family for you to do that.

Can you borrow secured on your own house, then lend that money to your parents? (In that case you'd effectively be your parents' mortgage lender, with a private mortgage - and you'd want two sets of solicitors to do it.)

Can you just make a monthly gift to your parents of the amount they're short on their existing mortgage?

Can you make a monthly interest free loan to your parents of the amount they're short, with the intention that you'll be paid back out of their estate?

polymooger

2bFrank said:

If you are renting it out you will be liable for CGT on the profit you sell the house for. so if you are buying it for £89k then in the future sell it for £155k the you will be liable for the difference (£66k), however there are rules regarding buying of family members that can make you liable for the full sale value, that you might need to look into.

Inheritance I wouldn't worry about if thats the amount of assets they have, as it will be under the limits (unless there is a drastic change).

You will pay extra stamp duty as it will be an additional home (be roughly in the £2,600 mark roughly give or take).

Deprivation of assets will be your biggest issue if your parents have to go into care. However this will be only the difference of the current value and outstanding mortgage (£21k). This would put them over the £14,250 allowed in assets but below the £23,250 (presuming the have no other savings or assets).  So they or you will be expected to make some, but not all contribution towards their care. However if they are healthy and well and care looks a long way off then this might not be an issue.

Who will be paying the rent will it be your parents income or will they be claiming benefits for the rent. If they are claiming benefits, then you are going to run into issues as there are rules regarding paying rent to family members on benefits. You will need to look into this further.

All excellent points, thank you.

This is a really crappy situation and it seems there obstacles to resolving it at every turn.

polymooger

Annisele said:

If there's any way for you to get hold of the £89k without securing the borrowing on your parent's house, it's probably better for your whole family for you to do that.

Can you borrow secured on your own house, then lend that money to your parents? (In that case you'd effectively be your parents' mortgage lender, with a private mortgage - and you'd want two sets of solicitors to do it.)

Can you just make a monthly gift to your parents of the amount they're short on their existing mortgage?

Can you make a monthly interest free loan to your parents of the amount they're short, with the intention that you'll be paid back out of their estate?

Hi and thanks.

 - Don't think borrowing against my own property would work. Not enough equity in it and I'm looking at interest-only for the BTL too, while my own mortgage is repayment. So that sounds complicated

- Monthly gift or loan: No. They have a ludicrously high mortage rate (just don't ask...) and due to employment situation (think gig employment forced by redundancy) can't pay it back except by selling the house, in this case to me.

Ultimately if they can't stay there then so be it, but I'm trying to avoid that happening.

Annisele

Equity release? They might be tight on the numbers though.

(My own view of equity release is that it's a last resort, and most people shouldn't touch it with a bargepole. But where it does work, it's great.)