Buying mum's house

ThorOdinson

We are considering buying mum's house. She wants to free up equity to buy a flat for my brother who has special needs. We would do a contract allowing her to live there forever, rent free. We would live there too. I understand the implications of this re relationships.

We would need a mortgage. Price would be under market value, but enough for her to buy a flat and fund her retirement. She has pensions too.

I'm trying to understand the potential costs, beyond mortgage and conveyancing.

She is widowed and I understand for inheritance tax we would get her and my dad's allowance. Is that correct? If so, no inheritance tax on the estate.

We are FTBs so no stamp duty, and no CGT as I understand it. 

If she doesn't pay rent, or only an amount before market value, I think it counts as a gift, right? There is a limit of £3k/year, so it would exceed that. What is the cost of that?

Is there anything else?

SDLT_Geek

ThorOdinson said:

We are considering buying mum's house. She wants to free up equity to buy a flat for my brother who has special needs. We would do a contract allowing her to live there forever, rent free. We would live there too. I understand the implications of this re relationships.

We would need a mortgage. Price would be under market value, but enough for her to buy a flat and fund her retirement. She has pensions too.

I'm trying to understand the potential costs, beyond mortgage and conveyancing.

She is widowed and I understand for inheritance tax we would get her and my dad's allowance. Is that correct? If so, no inheritance tax on the estate.

We are FTBs so no stamp duty, and no CGT as I understand it. 

If she doesn't pay rent, or only an amount before market value, I think it counts as a gift, right? There is a limit of £3k/year, so it would exceed that. What is the cost of that?

Is there anything else?

I wonder how you will get on with a mortgage when your mother, who is selling at undervalue, is to live there.

Assuming you can get over that problem, then the type of mortgage will be important as to whether the "chargeable consideration" for stamp duty land tax (assuming you are buying in England) is:

(a) the market value of the property or
(b) the lower sum your mother agrees to sell it to you for

https://www.blakemorgan.co.uk/bank-of-mum-and-dad-concessionary-purchases/

elsien

You also need to consider the implications of getting divorced if you are married. If you need to split the equity in the property to both go your separate ways how is that going to work with Mum’s lifetime guarantee? 

Depending on your mother’s age and state of health, she also needs to consider any implications for future potential  care costs if there is a reason reasonably foreseeable possibility that she may need care in the future. If she’s younger,  fit and healthy then it’s not an issue. If the pensions are enough to cover any future costs  then great; if not then if she already has some health issues thenselling a house undervalue might be an issue. 

Will the flat be in your brother’s name or kept in her own? 

ETA, you also need to look at whether this would count as a gift with reservation, either because you promise she can stay there or because she’s paying a token rent.

Grumpy_chap

ThorOdinson said:

We are considering buying mum's house.
We would do a contract allowing her to live there forever, rent free. We would live there too.

Price would be under market value, 

Well, that sounds like she would be gifting you part of the value of the house but retaining the right to life there.
That sounds like a gift with reservation (GWR).
If that is the case, then the value of the gifted part of the house would be deemed to remain within her Estate for IHT purposes (if appropriate) and also in the event that she needs care later in life.
I may have misunderstood this aspect, but it is important to get verified prior to processing the proposed transactions rather than risk getting caught out after the event.

ThorOdinson

It is England.

So reading your link, it sounds like the way to go is the "concessionary purchase / transfer at undervalue / gifted equity / family discount/ genuine bargain price" method, but some lenders do not lend on such purchases. So it may limit the choice of mortgages.

Otherwise stamp duty will be payable on everything over £300k of the market value.

I don't understand what the link says about IHT. The personal allowance if £325k per person, two parents, so is it not a total of £650k?

Keep_pedalling

There is a lot that could go horribly wrong here especially for your mother who would be giving up her long term security to do this. She could lose her home in the event of you divorcing, dying before she does or lose the ability to keep up with the mortgage payments. 

Is she planning to buy the flat in her name or your brother’s? 

Ms_Chocaholic

There is also a potential problem in that if she owns an asset (your brother's flat) and needs care in the future then that might be taken into consideration.  I don't know the ins and outs of it but just putting it out there.  

Where does your brother live currently? If he has special needs and receives benefits and lives in LA accommodation all the repairs etc are taken care of, will he be able to afford these if your mum buys him a property.