Parent selling house below market value and living onsite in 'granny annexe'

jmtra123

• My Mother-in-law has offered for my wife and I to buy her three-bed house off her (valued at £500,000)
• We cannot afford anywhere near market value (we can afford £150,000) 
• She still owes £70,000 on property - this would leave ~£80,000 for building her a granny annexe

In theory it would be a mutually beneficial situation; she would get to stay at the property (she loves location and doesn't think she'd find somewhere she'd want to move too), she also has her remaining mortgage paid off (she'd struggle to do so currently as semi-retired). We obviously benefit from getting a far nicer/larger house than what we could afford otherwise. 

We spoke to our mortgage adviser today and he aired concerns over potential Inheritance /  Capital Gains Tax. Would we be liable for CG tax on £350,000 equity she is 'gifting us'? Could this be seen as Stamp Duty / Inheritance tax etc avoidance? I've also read about issues if she'd need care later in life regarding 'deliberate deprivation of assets'.. Also issues around mortgage as she may be impossible to evict in event of repossession of property.

We are struggling to know where to go from here and would appreciate any thoughts / advice before going to a Conveyancing Solicitor. 

Many thanks

ACG

Have you thought about speaking to a solicitor? 

There are issues form the mortgage perspective:
1) The granny annex,
2) Gifting with strings attached (ie still being able to live in the property).

There are obviously other issues as you mention, tax implications, care cost implications etc. 

Rather than buying it below market value, it may be a case of buying it at market value but with a gift for the difference, same outcome but just a different paper exercise. You/mother in law need to be paying for professional advice upfront so it does not come back to bite down the line. 

Thrugelmir

Full of pit falls. If were that straightforward there would be an easy to follow book to guide you. 

Major issues are in summary

• Gift with reservation of benefit - IHT
• Deprivation of assets - care home fees
• Mortgage company would most certainly only lend if your MIL to vacate the property - benefit again. 

blues

I really wouldn’t go down this route. It’s fraught with issues & likely to cause you difficulties in the future.

Mickey666

These sorts of arrangements have financial and non-financial implications.
I can't really see any big financial implications.  MiL is basically gifting the OP £350k, OP gets £150k mortgage (shouldn't be too difficult at this LTV, OP builds granny annexe as extension.  No real tax implications - OP is not directly liable for any tax, the £350k might be treated as a PET or a gift with reservation, but that only means it is added back to MiL's estate for IHT calculations, which would be zero liability unless her estate is more than £500k (or £1m if she has inherited the NRB from husband perhaps?  We don't know the details).  Possible issue with 'deprivation of asset' issues if MiL requires a care home in the near future, but what does 'near future' mean?  If MiL is in good health and there's no reasonable expectation of needing a care home in the next 15, 20, 25 years then is this really 'deliberate' DOA?

OTOH, the NON-financial issues could be a real can of worms and no one on here can even begin to decide if it would be a wise arrangement or not because so much will depend on the personalities involved.  There's little doubt that it could all go horribly wrong if there was a big falling out or some other unexpected event, but that's all guesswork and betting.  At least the financial aspects are fairly quantifiable.