Buying 2nd property from elderly parent

moragg_2

Looking for advice. My mum owns a small house (lives in) and a one bedroom flat that she has rented out for twenty years. The rental from this has provided her with a steady income to boost her state pension. At 82 we feel she would now prefer the security of having a lump sum in the bank as her savings have depleted. Both properties combined would have a value of approximately £400,000. 

My husband and I would like to buy the flat from her if possible. It is probably worth about £150,000. Do we have to buy it at full market value? My mum would be happy to sell it to us for less which would be mutually beneficial. We live in Scotland. 

Advice appreciated 

SiliconChip

She can sell it to you for whatever price she likes, but I believe her CGT liability will be on the gain from purchase price to market value, and there may be IHT implications if she doesn't survive for 7 years. I don't think deprivation of assets is likely to be an issue if she requires care as the house she lives in can be sold to cover those costs.

Bookworm225

moragg_2 said:

Looking for advice. My mum owns a small house (lives in) and a one bedroom flat that she has rented out for twenty years. The rental from this has provided her with a steady income to boost her state pension. At 82 we feel she would now prefer the security of having a lump sum in the bank as her savings have depleted. Both properties combined would have a value of approximately £400,000. 

My husband and I would like to buy the flat from her if possible. It is probably worth about £150,000. Do we have to buy it at full market value? My mum would be happy to sell it to us for less which would be mutually beneficial. We live in Scotland. 

your mother can sell it to you for any price she wants you to pay her, what matters is:

a) she will be liable for CGT based on the market value of flat at point of sale, not what you physically pay her. That is because you are related to he so in tax terms are "connected persons" and therefore the tax calculation must use market value, not physical payment. She must declare her sale to HMRC within 60 days of the legal completion date and pay the tax by then. If she is already having to do a tax return she will additionally need to report the sale again on her tax return, but unless her finances have radically changed by then, she would not owe any further tax but still must report it

b) as the flat is in Scotland you, as purchaser, will be liable for LBTT and, unless you physically pay mother less than £40,000, you will also need to add on ADS (Additional Dwelling Supplement) because it is not your main home. Unlike CGT there is no market value rule for that, you will pay tax based on the physical amount you pay her.
ADS is +8% of the purchase price (ie starts from £0) and is on top of the basic LBTT bands (the latter starts at £145,000) . For example with 200k purchase price you'd pay £1,100 LBTT plus £16,000 ADS Total £17,100 tax. Use their calculator: Calculate property transactions | Revenue Scotland

c) with a combined value of only 400k it appears unlikely that mother's estate will be above the IHT threshold when she dies but technically if she sells it to you for less than market value that "discount" is treated as a gift for IHT purposes and will remain within her estate for a further 7 years. If she lives more than 7 years it falls out of her estate. 

d) at age 82 there is reasonable risk that if she needs to claim means tested care home fees if she goes into a home then any discount she gives you would be regarded as deliberate deprivation of capital. So she would be assessed on the full value of the property, not the cash in her bank. Reality check: even at age 82 only a tiny percentage of people end up in care homes.

e) if the flat is currently tenanted you will of course need to follow all the rules applicable to being a LL in Scotland. There are a lot of them and some are very different to those in England. Here is a startpoint, but do a lot more research yourself than a few answers on a forum: Your responsibilities as a private landlord - mygov.scot

Keep_pedalling

As above disposing of the flat to a connected person will leave her with a CGT liability based on the full market value not the price paid. 

I would not worry about IHT, gifting never has a negative impact on it.

Is the plan for you to live in it or continue to rent it out?

TheSpectator

If it's providing a 'steady income' then why are savings being depleted. Given she will be liable for CGT on the full market value regardless isn't the obvious solution to put it on the market for that price.

Unless it's particularly high yielding rent?

Albermarle

 Reality check: even at age 82 only a tiny percentage of people end up in care homes.

Yes the fear of going into a care home and spending all your money/losing your house is much greater than the reality ( same as the fear of crime).
According to the ONS in your 70's you only have around a 1 % chance of being in  a care home, and only about 4 % in your 80's. It is around 15% in your 90's.
However if you take into account many  people never make it to be that old , then the 'real' % will be less.