Advice on buying house from mother

OpalMiner11

Hi all,

My mother has an investment property, which she owns outright and I would like to buy from her.

I will not qualify for a mortgage, so she is planning on being the bank in the transaction. I would give her a 20% deposit from my own money and would pay 80% over a term of 15 years at an annually adjusted interest rate (probably BOE base rate + 1.1%).

We understand the pitfalls of lending money to family/friends but would be happy with an informal arrangement. The risk is low as my mother does not need the money and would reduce my share of any inheritance if I were to default. 

What would be the optimal way to structure the transaction to avoid as much complication and fees as possible? I understand that the land registry forms TR1 and AP1 must be completed but should we also get a solicitor to draw up the loan terms in legal speak? We don't need searches etc. as I know the property intimately. 

Having spoken to a few solicitors they want us to both appoint different solicitors and go through the whole conveyancing process but we'd like to avoid that if at all possible.

Furthermore, under such a loan arrangement could the interest could be deducted (if applicable)?

Thanks very much.

SDLT_Geek

Have you budgeted for stamp duty land tax on the purchase price?  The extra 3% for additional properties will apply?

OpalMiner11

SDLT_Geek said:

Have you budgeted for stamp duty land tax on the purchase price?  The extra 3% for additional properties will apply?

Thanks. I am a first time homebuyer and as the property is worth £269k I haven't budgeted for it.

Section62

OpalMiner11 said:

...but should we also get a solicitor to draw up the loan terms in legal speak?

Yes, and as suggested, you should have different solicitors advising each of you.

The agreement needs to address what arrangements will be made if the worst happens to either your mum or you.  E.g. will the loan have to be repaid in order to pay other beneficiaries in her will?

Also, if you are in a relationship, or plan to be in the next 15 years, you need to consider what might happen if that relationship breaks down. Unless you can document that you have been loaned the value of the transaction and the money is to be repaid (rather than owning the property outright) then an ex-partner/spouse might seek a share of the full value of the property instead of a share of the net equity.

A good solicitor will know all the pitfalls and advise you how to avoid them. The money spent now could be worth a much greater saving in the future.

Keswick1uk

Yoir Mother needs to consider payment of capital gains tax on the transfer to you (based on market rates)

SDLT_Geek

OpalMiner11 said:

SDLT_Geek said:

Have you budgeted for stamp duty land tax on the purchase price?  The extra 3% for additional properties will apply?

Thanks. I am a first time homebuyer and as the property is worth £269k I haven't budgeted for it.

But if it is an investment property it is let and you can’t live in it?  So no first time buyers relief presumably.  You could get it completed within the SDLT holiday?

OpalMiner11

Section62 said:

OpalMiner11 said:

...but should we also get a solicitor to draw up the loan terms in legal speak?

Yes, and as suggested, you should have different solicitors advising each of you.

The agreement needs to address what arrangements will be made if the worst happens to either your mum or you.  E.g. will the loan have to be repaid in order to pay other beneficiaries in her will?

Also, if you are in a relationship, or plan to be in the next 15 years, you need to consider what might happen if that relationship breaks down. Unless you can document that you have been loaned the value of the transaction and the money is to be repaid (rather than owning the property outright) then an ex-partner/spouse might seek a share of the full value of the property instead of a share of the net equity.

A good solicitor will know all the pitfalls and advise you how to avoid them. The money spent now could be worth a much greater saving in the future.

Would this detail be contained within the CH1 form as a charge on the property? But yes you are correct and if mum died, the loan would need to be repaid. Thanks for the pointers re relationship, I am not currently in one but will bear that in mind.

Keswick1uk said:

Yoir Mother needs to consider payment of capital gains tax on the transfer to you (based on market rates)

We have considered this and she has a loss to offset it against.

SDLT_Geek said:

OpalMiner11 said:

SDLT_Geek said:

Have you budgeted for stamp duty land tax on the purchase price?  The extra 3% for additional properties will apply?

Thanks. I am a first time homebuyer and as the property is worth £269k I haven't budgeted for it.

But if it is an investment property it is let and you can’t live in it?  So no first time buyers relief presumably.  You could get it completed within the SDLT holiday?

The tenants are moving out any week as they are buying a property. Ideally it would be nice to get it within the SDLT holiday but I believe under 300k should be ok as a first time buyer too?

xylophone

Having spoken to a few solicitors they want us to both appoint different solicitors and go through the whole conveyancing process but we'd like to avoid that if at all possible.

I'd go for a formal loan agreement with your mother taking a first charge against the property.

Your mother should check on CGT with respect to "deferred consideration"?

You will be paying interest to your mother?

She will need to declare this to HMRC as taxable income.

getmore4less

The interest adds a income tax complication.

It could be structured to avoid that.

Loan agreement will need to take account of can't pay situations.

It does not have to be payable on demand/death it could run longer.

OpalMiner11

xylophone said:

Having spoken to a few solicitors they want us to both appoint different solicitors and go through the whole conveyancing process but we'd like to avoid that if at all possible.

I'd go for a formal loan agreement with your mother taking a first charge against the property.

Your mother should check on CGT with respect to "deferred consideration"?

You will be paying interest to your mother?

She will need to declare this to HMRC as taxable income.

Thanks - we’ll look into deferred consideration. I’d like to draft a formal loan agreement myself (and ideally do it all myself) in the interest of saving fees - would you say that’s unwise?

getmore4less said:

The interest adds a income tax complication.

It could be structured to avoid that.

Loan agreement will need to take account of can't pay situations.

It does not have to be payable on demand/death it could run longer.

Thanks. How could it be structured to avoid the income tax complication?

getmore4less

House prices have a range you could pay a bit more but then there is a trade off for CGT against income taxes.
Set the interest rate to zero and use your imagination.