How to buy a second property

MDOTML

I recently became 'tenant in common' (50/50 split) on a bungalow my cousin, who is based in America. 

The bungalow was originally left entirely to my cousin as part of an estate following the death of my Aunt, but my cousin wanted to gift 50% of the property to me, with me to buy the remaining 50% at a reduced cost (£100,000 is being asked for the remaining 50%, with a current market value on the property of around £300,000) so during the probate process my cousin arranged to have the will amended accordingly.

I intend to keep my current home and have my son live in the bungalow. My first thought is to simply get a mortgage on the bungalow or borrow against our own home (we have about £80k outstanding on our current mortgage on our house, worth about £350k) and buy the bungalow, but on the basis of 'you don't know what you don't know', I just wondered if there was a better way of doing this, or if there were any pitfalls I should look out for? I contacted several local financial advisors on this, but the couple that replied were only able to offer a consultation with their mortgage advisor.. I'm really looking for bigger picture advise first, then a mortgage if that's the right way forward. 

Sorry for the long post and thank you for any input! 

Bookworm225

presumably the bungalow is in the UK and the residency of the cousin is rather irrelevant.
 
Is the aunt's estate subject to UK law and tax?
how was the 50% "given" to you (this has SDLT and CGT implications on you):
- by variation of the original will
or
- by gift from cousin after he inherited 100% of the bungalow.

MDOTML

Thanks Bookworm!

Yes, the bungalow is in the UK and yes, my aunts estate is subject to UK law and tax.

The 50% was given by way of a variation of the original will. 

I'd appreciate any guidance - thank you 

GDB2222

Could you raise £100k and give or lend it to your son. He buys half the bungalow from aunt's estate. You give him your 50%. Job done. He owns 100%. Any increase in capital value is free of CGT. 

Any reason your son is unable to get a mortgage? 

MDOTML

GDB2222 said:

Could you raise £100k and give or lend it to your son. He buys half the bungalow from aunt's estate. You give him your 50%. Job done. He owns 100%. Any increase in capital value is free of CGT. 

Any reason your son is unable to get a mortgage? 

Thank you GDB2222. I could only raise that with some sort of loan. 

He's literally just finished Uni and starts his first job in a few months.. I've not enquired but I doubt banks would be queuing up to give him a mortgage at this stage

Bookworm225

MDOTML said:

Thanks Bookworm!

Yes, the bungalow is in the UK and yes, my aunts estate is subject to UK law and tax.

The 50% was given by way of a variation of the original will. 

I'd appreciate any guidance - thank you 

ok, sorry did not read your first post properly.

So your cousin will rightly expect to receive actual money for selling his share meaning your options are :

.- pay him £100k lump sum which you have funded via a (mortgage) loan secured on the house itself. In that case you would need to be the legal owner of the property and the lender would need to agree to it being occupied by a family member who is not on that mortgage (so a repossession needs to evict the occupant as well as take over from the legal owner). Such mortgages easily exist, but best found via a mortgage broker

- pay him £100k lump sum which you have funded via a release of equity in your own house, ie re-mortgage of your current property. The lender may want to know what the funds will be used for, but won't be so concerned about having an occupant not on the mortgage since the security is your own house so they repossess it from you without needing to turf out your son.

- agree payment terms with your cousin and do it as a "private" mortgage. Obviously cousin will get a monthly income rather than a lump sum. It may or may not involve you paying interest to cousin on top of the 100k "price".  As a non UK resident cousin is outside the scope of UK legalisation relating to consumer lending law, but may dislike his own USA tax exposure. 

I leave it to @SDLT_geek to explain the SDLT implications for you of purchasing the remaining 50% share of what is an inherited but nonetheless "additional" property for you.

MDOTML

Bookworm225 said:

MDOTML said:

Thanks Bookworm!

Yes, the bungalow is in the UK and yes, my aunts estate is subject to UK law and tax.

The 50% was given by way of a variation of the original will. 

I'd appreciate any guidance - thank you 

ok, sorry did not read your first post properly.

So your cousin will rightly expect to receive actual money for selling his share meaning your options are :

.- pay him £100k lump sum which you have funded via a (mortgage) loan secured on the house itself. In that case you would need to be the legal owner of the property and the lender would need to agree to it being occupied by a family member who is not on that mortgage (so a repossession needs to evict the occupant as well as take over from the legal owner). Such mortgages easily exist, but best found via a mortgage broker

- pay him £100k lump sum which you have funded via a release of equity in your own house, ie re-mortgage of your current property. The lender may want to know what the funds will be used for, but won't be so concerned about having an occupant not on the mortgage since the security is your own house so they repossess it from you without needing to turf out your son.

- agree payment terms with your cousin and do it as a "private" mortgage. Obviously cousin will get a monthly income rather than a lump sum. It may or may not involve you paying interest to cousin on top of the 100k "price".  As a non UK resident cousin is outside the scope of UK legalisation relating to consumer lending law, but may dislike his own USA tax exposure. 

I leave it to @SDLT_geek to explain the SDLT implications for you of purchasing the remaining 50% share of what is an inherited but nonetheless "additional" property for you.

Thanks very much for this Bookworm. Following your input, I'm drawn towards the re-mortgaging my current home route. It seems the cleanest and most straightforward and I guess means we can do what we like with the bungalow in terms of family living there or even renting out. 

If anyone can give some guidance on the tax side of things I'd be most grateful.. I'm a complete amateur at this and have literally no idea what bills could land on my doormat if I go ahead! 

MDOTML

@SDLT_Geek Hi.. you were tagged here  If you've got any input I'd really appreciate it. I'm completely in the dark about what tax bills or avoidable pitfalls there are

silvercar

I don’t think a cousin counts as a related party, as far as SDLT is concerned. So I’d expect the SDLT to be calculated on the actual amount payable, which would be zero on amounts under £125k. Though as this would be a second property there would be the extra stamp duty of 5% on £100k, so £5k.

Any IHT would be on the aunts estate, not a concern for you as you aren’t a benefactor, other than the Deed of Variation giving you half the property - I’m guessing there is money in the estate also, if the total estate is over the IHT threshold.

There is no CGT on death.

So all in all, I don’t think you have any tax worries.

amended thanks to others comments.

RAS

Does your son wanted his future to be restricted by living in the bungalow? Or does he want to travel, relocate for his career, emigrate? It may sound lovely to you but is it fully what he wants?

sheramber

silvercar said:

I don’t think a cousin counts as a related party, as far as SDLT is concerned. So I’d expect the SDLT to be calculated on the actual amount payable, which would be zero on amounts under £125k.

Any IHT would be on the aunts estate, not a concern for you as you aren’t a benefactor, other than the Deed of Variation giving you half the property - I’m guessing there is money in the estate also, if the total estate is over the IHT threshold.

There is no CGT on death.

So all in all, I don’t think you have any tax worries.

Would buying the balance  of the bungalow count  for additional stamp charge for second home?