First time buyer struggling with deed of gift & a mortgage

BeyondTheVault

Hi all,

I'm looking for advice on the implications of using a deed of gift in a property purchase. I'm a first-time buyer planning to buy a holiday home from my elderly parents, which they do not live in.

A mortgage broker suggested that instead of saving for a deposit, my parents could gift me £20,000 via a deed of gift, which would count as my deposit.

I'm unfamiliar with mortgages and have only recently learned about inheritance tax, so this has been quite confusing. I've also come across conflicting information online about buying property below market value and how that might affect things later.

To give you the full picture:

• The property is valued at around £180,000.

• My parents are considering selling it to me for £140,000.

• They would then gift me £20,000 toward the deposit via a deed of gift.

• I also commissioned a survey, which flagged aging suspended wooden floors and a flat roof that may need replacing in 5–10 years.

My main questions are:

1. If my parents sell the property below market value and gift part of the deposit, are there legal or tax implications I should be aware of?

2. Would the £40,000 discount be considered a gift in itself?

3. Given their age, how might the 7-year inheritance tax rule apply?

4. Will the survey findings affect the property's sale price or mortgage approval?

Thanks in advance for any clarity or advice.

Keep_pedalling

BeyondTheVault said:

Hi all,

I'm looking for advice on the implications of using a deed of gift in a property purchase. I'm a first-time buyer planning to buy a holiday home from my elderly parents, which they do not live in.

A mortgage broker suggested that instead of saving for a deposit, my parents could gift me £20,000 via a deed of gift, which would count as my deposit.

I'm unfamiliar with mortgages and have only recently learned about inheritance tax, so this has been quite confusing. I've also come across conflicting information online about buying property below market value and how that might affect things later.

To give you the full picture:

• The property is valued at around £180,000.

• My parents are considering selling it to me for £140,000.

• They would then gift me £20,000 toward the deposit via a deed of gift.

• I also commissioned a survey, which flagged aging suspended wooden floors and a flat roof that may need replacing in 5–10 years.

My main questions are:

1. If my parents sell the property below market value and gift part of the deposit, are there legal or tax implications I should be aware of?

2. Would the £40,000 discount be considered a gift in itself?

3. Given their age, how might the 7-year inheritance tax rule apply?

4. Will the survey findings affect the property's sale price or mortgage approval?

Thanks in advance for any clarity or advice.

If the value is £180k you are buying for £140k then your parents are effectively gifting you £40k so I don’t see why a separate gift is required unless you are unable to get a mortgage to cover it. 

They should be aware that for CGT purposes the disposal is deemed to full market value not the price you are paying.

Gifting over you exemptions will always be subject to the 7 year rule, but that is no reason not to gift as the worse that can happen is the same amount of IHT would be due as it would if you never made the gift. If they have not used this years allowance then only £34k would be subject to the 7 year rule, and if they did not use the previous year’s allowance then that can be carried forward to reduce that to £28k.

user1977

Are you going to live in the property or will it remain a holiday home? If the latter, have you checked you can get a mortgage for that use?

BeyondTheVault

Keep_pedalling said:

BeyondTheVault said:

Hi all,

I'm looking for advice on the implications of using a deed of gift in a property purchase. I'm a first-time buyer planning to buy a holiday home from my elderly parents, which they do not live in.

A mortgage broker suggested that instead of saving for a deposit, my parents could gift me £20,000 via a deed of gift, which would count as my deposit.

I'm unfamiliar with mortgages and have only recently learned about inheritance tax, so this has been quite confusing. I've also come across conflicting information online about buying property below market value and how that might affect things later.

To give you the full picture:

• The property is valued at around £180,000.

• My parents are considering selling it to me for £140,000.

• They would then gift me £20,000 toward the deposit via a deed of gift.

• I also commissioned a survey, which flagged aging suspended wooden floors and a flat roof that may need replacing in 5–10 years.

My main questions are:

1. If my parents sell the property below market value and gift part of the deposit, are there legal or tax implications I should be aware of?

2. Would the £40,000 discount be considered a gift in itself?

3. Given their age, how might the 7-year inheritance tax rule apply?

4. Will the survey findings affect the property's sale price or mortgage approval?

Thanks in advance for any clarity or advice.

If the value is £180k you are buying for £140k then your parents are effectively gifting you £40k so I don’t see why a separate gift is required unless you are unable to get a mortgage to cover it. 

They should be aware that for CGT purposes the disposal is deemed to full market value not the price you are paying.

Gifting over you exemptions will always be subject to the 7 year rule, but that is no reason not to gift as the worse that can happen is the same amount of IHT would be due as it would if you never made the gift. If they have not used this years allowance then only £34k would be subject to the 7 year rule, and if they did not use the previous year’s allowance then that can be carried forward to reduce that to £28k.

In terms of capital gains tax, do you mean that they will be liable to pay tax for the full amount of £180,000 and not what they opt to sell it for? I.E. 18% as they are both on low income state & private pensions?

I'm not sure what you mean regarding IHT and allowances. Could you elaborate further please?

Thanks! 

BeyondTheVault

user1977 said:

Are you going to live in the property or will it remain a holiday home? If the latter, have you checked you can get a mortgage for that use?

I will be living in the property. Is there anything they need to do as it will be now considered a permanent residence?

user1977

BeyondTheVault said:

user1977 said:

Are you going to live in the property or will it remain a holiday home? If the latter, have you checked you can get a mortgage for that use?

I will be living in the property. Is there anything they need to do as it will be now considered a permanent residence?

Only if there are any title or planning restrictions that would prohibit permanent residential use.

Hoenir

BeyondTheVault said:

Keep_pedalling said:

BeyondTheVault said:

Hi all,

I'm looking for advice on the implications of using a deed of gift in a property purchase. I'm a first-time buyer planning to buy a holiday home from my elderly parents, which they do not live in.

A mortgage broker suggested that instead of saving for a deposit, my parents could gift me £20,000 via a deed of gift, which would count as my deposit.

I'm unfamiliar with mortgages and have only recently learned about inheritance tax, so this has been quite confusing. I've also come across conflicting information online about buying property below market value and how that might affect things later.

To give you the full picture:

• The property is valued at around £180,000.

• My parents are considering selling it to me for £140,000.

• They would then gift me £20,000 toward the deposit via a deed of gift.

• I also commissioned a survey, which flagged aging suspended wooden floors and a flat roof that may need replacing in 5–10 years.

My main questions are:

1. If my parents sell the property below market value and gift part of the deposit, are there legal or tax implications I should be aware of?

2. Would the £40,000 discount be considered a gift in itself?

3. Given their age, how might the 7-year inheritance tax rule apply?

4. Will the survey findings affect the property's sale price or mortgage approval?

Thanks in advance for any clarity or advice.

If the value is £180k you are buying for £140k then your parents are effectively gifting you £40k so I don’t see why a separate gift is required unless you are unable to get a mortgage to cover it. 

They should be aware that for CGT purposes the disposal is deemed to full market value not the price you are paying.

Gifting over you exemptions will always be subject to the 7 year rule, but that is no reason not to gift as the worse that can happen is the same amount of IHT would be due as it would if you never made the gift. If they have not used this years allowance then only £34k would be subject to the 7 year rule, and if they did not use the previous year’s allowance then that can be carried forward to reduce that to £28k.

In terms of capital gains tax, do you mean that they will be liable to pay tax for the full amount of £180,000 and not what they opt to sell it for? I.E. 18% as they are both on low income state & private pensions?

CGT is calculated on the difference between the purchase and selling price, after taking into account applicable fees. 

Keep_pedalling

BeyondTheVault said:

Keep_pedalling said:

BeyondTheVault said:

Hi all,

I'm looking for advice on the implications of using a deed of gift in a property purchase. I'm a first-time buyer planning to buy a holiday home from my elderly parents, which they do not live in.

A mortgage broker suggested that instead of saving for a deposit, my parents could gift me £20,000 via a deed of gift, which would count as my deposit.

I'm unfamiliar with mortgages and have only recently learned about inheritance tax, so this has been quite confusing. I've also come across conflicting information online about buying property below market value and how that might affect things later.

To give you the full picture:

• The property is valued at around £180,000.

• My parents are considering selling it to me for £140,000.

• They would then gift me £20,000 toward the deposit via a deed of gift.

• I also commissioned a survey, which flagged aging suspended wooden floors and a flat roof that may need replacing in 5–10 years.

My main questions are:

1. If my parents sell the property below market value and gift part of the deposit, are there legal or tax implications I should be aware of?

2. Would the £40,000 discount be considered a gift in itself?

3. Given their age, how might the 7-year inheritance tax rule apply?

4. Will the survey findings affect the property's sale price or mortgage approval?

Thanks in advance for any clarity or advice.

If the value is £180k you are buying for £140k then your parents are effectively gifting you £40k so I don’t see why a separate gift is required unless you are unable to get a mortgage to cover it. 

They should be aware that for CGT purposes the disposal is deemed to full market value not the price you are paying.

Gifting over you exemptions will always be subject to the 7 year rule, but that is no reason not to gift as the worse that can happen is the same amount of IHT would be due as it would if you never made the gift. If they have not used this years allowance then only £34k would be subject to the 7 year rule, and if they did not use the previous year’s allowance then that can be carried forward to reduce that to £28k.

In terms of capital gains tax, do you mean that they will be liable to pay tax for the full amount of £180,000 and not what they opt to sell it for? I.E. 18% as they are both on low income state & private pensions?

I'm not sure what you mean regarding IHT and allowances. Could you elaborate further please?

Thanks! 

For transfers between connected persons CGT is treated as though it was made at full market value even if the property was given away. So if they originally paid £100k for it there would be a capital gain of £80k even if they gifted the whole thing to you.

Every one gets an annual IHT gift exemption of £3,000 which if not used can be carried over for one year. If your parents have not this years allowances then £6000 (£3000 each) of the £40k they are giving you falls straight of their estates, and if they did you use the previous year’s allowance that can be added as well. Anything over that is subject to the 7 year rule so they would have to survive 7 years after the gift for it to fall out of the estate.

The important thing to remember here if that making larger gifts never increases any potential IHT liability so it is no reason not to gift especially if your estate is in IHT territory.  If your parent total current net worth is under £1M then their estates are unlikely to have to pay IHT anyway.

Albermarle

When your parents die are they likely to have enough assets to be potentially liable for inheritance tax?

If not then discussions about gifts, 7 year rules etc are really not relevant.

They both have a £325K IHT allowance, which can be passed on , so on second death there will be £650K .
If they leave their home to you ( or another sibling) then there is another £350K of allowance. So One Million in total.

So is it likely that their total assets ( savings, home, valuables etc) will be anywhere near One Million Pounds?
If not, you can forget about any IHT issues.

SDLT_Geek

Hoenir said:

BeyondTheVault said:

Keep_pedalling said:

BeyondTheVault said:

Hi all,

I'm looking for advice on the implications of using a deed of gift in a property purchase. I'm a first-time buyer planning to buy a holiday home from my elderly parents, which they do not live in.

A mortgage broker suggested that instead of saving for a deposit, my parents could gift me £20,000 via a deed of gift, which would count as my deposit.

I'm unfamiliar with mortgages and have only recently learned about inheritance tax, so this has been quite confusing. I've also come across conflicting information online about buying property below market value and how that might affect things later.

To give you the full picture:

• The property is valued at around £180,000.

• My parents are considering selling it to me for £140,000.

• They would then gift me £20,000 toward the deposit via a deed of gift.

• I also commissioned a survey, which flagged aging suspended wooden floors and a flat roof that may need replacing in 5–10 years.

My main questions are:

1. If my parents sell the property below market value and gift part of the deposit, are there legal or tax implications I should be aware of?

2. Would the £40,000 discount be considered a gift in itself?

3. Given their age, how might the 7-year inheritance tax rule apply?

4. Will the survey findings affect the property's sale price or mortgage approval?

Thanks in advance for any clarity or advice.

If the value is £180k you are buying for £140k then your parents are effectively gifting you £40k so I don’t see why a separate gift is required unless you are unable to get a mortgage to cover it. 

They should be aware that for CGT purposes the disposal is deemed to full market value not the price you are paying.

Gifting over you exemptions will always be subject to the 7 year rule, but that is no reason not to gift as the worse that can happen is the same amount of IHT would be due as it would if you never made the gift. If they have not used this years allowance then only £34k would be subject to the 7 year rule, and if they did not use the previous year’s allowance then that can be carried forward to reduce that to £28k.

In terms of capital gains tax, do you mean that they will be liable to pay tax for the full amount of £180,000 and not what they opt to sell it for? I.E. 18% as they are both on low income state & private pensions?

CGT is calculated on the difference between the purchase and selling price, after taking into account applicable fees. 

But with CGT for "selling price" we substitute market value in cases like this.

The SDLT is likely to be calculated on the price stated in the transfer.  That in turn depends on the type of mortgage used, see the article here: https://www.blakemorgan.co.uk/bank-of-mum-and-dad-concessionary-purchases/