Purchasing a Share of an Inherited Family Property by Instalments

DuffStuff

Hello.

As an only child, I inherited my parent’s nearby property a few years ago and it is solely in my name.  We have three adult children – one married with his own family living abroad, one settled with a partner living a distance away and a son who is sole parent with his young son, living in my parent’s house which I inherited.  My son initially paid rent but now with loss of earnings, has been living rent free. Our other children are significantly more financially secure.

Can I set up an agreement so that any future payments my son makes be used to pay towards him purchasing the house? In effect, his payments would be interest-free instalments, purchasing him a gradually escalating percentage share of the value of the property rather than rent.   I do not envisage that he will have completely purchased the property in my lifetime but will have a percentage share. As these would not be rental payments, I presume I would not have to pay income tax on the payments he is making? But what other implications are there – for example, would stamp duty be payable? How do I document this arrangement? What would be required regarding the Land Registry?

I do not want to ‘gift’ the property to him at the moment but as my husband and I have not made wills yet, we need to consider how best to make provision for our children to inherit in a fair way.

Thank you. 

TBagpuss

It sounds as though you and your husband do need to make wills and to decide how you want to leave the property (bearing in mind of course that the fincial positions of all three children could shift between now d wen you and your husband die)
What's your key aim? Are you primarily truing to avoid paying income tax on the rental income or are you primarily looking to allow him to buy the house?

You could think of various options:

1. Sell the house, give or lend him a lump sum to use a deposit to buy somewhere of his own, leave the balance to your other children.

2. Lend him a lump sum to buy a share of the house and then let him pay you back gradually - you and he would own as tenants in common in unequal shares and he would be paying back the loan to you. You'd need to take legal advice as to whether this can be set up so that the money never actually changes hands (i.e. you don't have to lend him £xxx which he then solemnly paid to you to buy a share of the house) You'd need formal written agreements drawn up by a solicitor to track what the terms of the loan were, and to set out how and when either of you could force a sale of the property or (in your case) seek early repayment of the loan. 

3. Put the money he pays in rent to one side then gift it to back to him to use to buy a % of the house 

theoretica

If you are selling a portion of the house you would need to look at Capital Gains Tax. 

Option 4 - ask/encourage him to put aside and invest the money he would be paying you in rent so that he has built up a nest egg for when you are no longer there to support him. 

You could consider also writing your will to give him a right to stay in the house until your grandson is out of school or 21 to ensure stability for his childhood, but not delay your other children's inheritance indefinitely.

DuffStuff

Many thanks for your helpful replies.

My son (who is currently living rent-free due to the impact of Covid-19) is raising his young son on his own and his financial security is substantially less safe than is the case for my other two children.   As you point out, this could possibly change in time, (although I consider that this is unlikely) but it helps to explain why I wouldn’t want to simply gift the house to my son.   Allowing him to purchase small amounts of the house each year would allow me to maintain an element of control, since I am always likely to own the lion’s share of the property.   If my other children were to have more need for future assistance then I would still have some capacity to help.

I do consider that I love all my children equally but their individual needs will vary, according to their personal life choices.   Ideally, it would be lovely to treat them all totally evenly.   However, by way of a (highly exaggerated) analogy, is it appropriate to give exactly the same financial support to the child eating caviar for lunch as I give to the child who is homeless?   One of my greatest concerns is that my son and grandson currently have very little security and this looks unlikely to change greatly, without my assistance.

The house that I inherited is a fairly modest property and certainly a one third share would not be adequate to allow him to provide for much more than a good deposit on another home. When I inherited the house, my plan was to use the rental income to help me to eke out my fairly poor pension.   Family circumstances have changed and by some belt tightening we manage to live comfortably with our combined pensions so the rental income is currently less important, although if my husband was to pass away before myself then that could leave me more exposed.

Receiving a regular monthly sum (something broadly equivalent to the missing rent) would therefore be very helpful.   Not having lavish tastes, I am most unlikely to ever need to call upon the capital – effectively stored in the inherited house. However, by converting a small portion of the stored capital (each month) into something with better liquidity I would be able to live more comfortably, especially as the cost of living, rising fuel costs etc make budgeting more difficult.  Effectively, an equity release scheme but with the beneficiaries being my family.

The scheme that I had in mind would hopefully mean that the monthly payments towards the house purchase would not be deemed to be income (since I would not be making any profit on these small sales) as zero interest would be charged.   Hence there should not be any income tax to pay, effectively increasing the value of the sum that my son would send me – compared to taxable, rental income.

I appreciate Capital Gains might be an issue, although the house value itself has probably only increased fairly modestly since I inherited it.

What I am not sure about is whether my suggested scheme is doable?   I’ve not been able to find any instances of others regularly selling small portions of their property and I’ve not discussed it with HMRC at this stage. I certainly do not want to be the wrong side of the law regarding tax purposes. Consequently, do I need to find a Financial Advisor or would a solicitor writing a will be able to give advice?

Many thanks once again.

 

Twixty3

These days lots of single parents have to pay something  towards their rent with the house prices, rents and local Housing Allowances  the way they are they but as your grandchild grows your son should be able to work (if they are able to) and gradually increase hours as the child grows.

Many single parents are able to rent and buy once they increase their hours and later work full time although this is getting harder for many especially finding the deposits so at some point they should be able to pay you something perhaps close to full rent so your plan could work if you settle on an agreeable  amount and gradually work up to a full, or close to,  rent as their income grows if you need it. That full or almost full rent could become majority income for you and some for savings for them? 

If you are in need of the rent the current plans  may not work for you so possibly you look for  somewhere were they can get assistance with paying rent,  council or private,  that may be worth considering  so that you can obtain full rental income? 

Sometimes a good deposit can go a long way to help purchase a property.  It all depends on house prices where you are.  Are cheaper places available slightly further away for example?

I can't  think of a way they could buy from you in stages apart from tenants in common. But perhaps they could do that elsewhere?   There is a co ownership scheme/rent to buy  available here which has helped lots of people where you part buy and rent. So it could it even work out better that they do not buy your inherited house but another property ? again it is likely dependant on house prices in your area.




 

getmore4less

Who will be responsible for maintaining the place.

One  simple option is you sell the house to him you become the lender on an interest free basis.

You get repaid over time and if still outstanding when you pass you can have him pay the other kids or have it repayable in full or cancelled as part of his inheritance.
Could also have it repayable if sold.

Not ideal if you want to keep/share the place between the 3 kids at some point.

CGT assessment on sale(same if you gifted)

Options like sell a bit, where your other kids inherit later,  or giving him life interest now are far from ideal as they have complications.

Resolving the what's fare/equitable is difficult as the other 2 kids being able to benefit  is going to be delayed maybe never and it ends up being the next generation.

Might be easier to consider it your asset and how you get the best from it.

Selling(to son) and using the payout is one way even if it is in installments.

Keep_pedalling

You proposal is too complex and presents both CGT and income tax issues. Owning a small portion of the house would also lose him his first time buyer status. The best way to provide him and your grandson with security it to make a will. A solicitor will help in drafting a will that meets your aims.

DuffStuff

Thank you all for your thoughts and suggestions - I do appreciate you taking the time to respond. We realise how fortunate we are to be in a position to help our family with the inherited property and you have raised many valid options that we must now consider.  I certainly think one of our next steps is to make a will. Thank you again.

Mojisola

getmore4less said:

One  simple option is you sell the house to him you become the lender on an interest free basis.

I would go for this option.

You will need to decide what happens if the house isn't paid off by the time you die and have a will made, setting that out.

peb

It is possible but messy.  Look at rental purchase agreements or as suggested above transfer the property to him but he grants you an interest free mortgage.  Bear in mind neither arrangement is straight forward or common and will thus likely to be fee heavy.

You will also have to decide what happens on your death if monies due not paid


No idea about tax

pickledonionspaceraider

'However, by way of a (highly exaggerated) analogy, is it appropriate to give exactly the same financial support to the child eating caviar for lunch as I give to the child who is homeless?'

If you are talking about leaving it in a Will - then I think treating them all the same is the way forwards.
Peoples circumstances change, people divorce and lose jobs and homes all the times so the ones who are financially secure cannot be guaranteed to be always so.

I have a friend - lets call her Barbara - she was married with a mortgage.  Barbara's sister had never worked and lived in a council flat
Barbara and her husband pretty much lived week to week, and didn't have spare money for holidays etc.   Her parents died and left their home to her sister.. A few months before the parents unexpectedly died, Barbara had to flee domestic violence and ended up in a women's shelter - and couldn't  get a council flat. Whereas the sister  gave up her council flat to move into the inherited house - and Barbara was left with nothing. Barbara's only choice was to privately rent a flat, which leaves her some stalk choices about whether to eat food or put the heating on. She lives in abject poverty even though she works full time.  

 Life changes, circumstances change- relationships break down and people lose homes