FTB advice - help from parents and tax implications

nicki_bee

Hello

I am writing for a little advice. My partner and I are first time buyers looking to buy in London. We both have permanent jobs (£30,500 and £21,700) so have worked out we can borrow about £150,000 together. We have no deposit to speak of (just around £5,000 in saving which we’ll need for stamp duty, fees, etc). My partner’s father has agreed to release some of the equity in his property (which is worth about £800,000 with £60,000 left to pay on his own mortgage) to help us out. We have been looking for properties around £250,000. What were not sure of is if he re-mortgaged for £100,000, what would be the best way to use it. We will be paying back both the repayments on his mortgage and our mortgage (we intend both mortgages to be interest-only.) Could he give us the £100,000 which we could then use as a deposit (however I presume there would be gift tax implications in doing this) or will it be more sensible for him to be named on the property and make it shared between all three of us (however I’m sure there will be implications involving Capital Gains Tax for him)? If we did it the later way and shared the property between the three of us would that mean that my partner and I would in effect be asking for a 100% mortgage (even though we were borrowing £150,000 on a £250,000 property), in which case we would not be able to get the mortgage which we have found (Scarborough BC, 4.49% fixed for 3 years) without finding a deposit.

We did orginally look at my partners father guarantoring us (he earns £95,000) however found the mortgages on offer if he did this had rates at a round 5.99%, in which case we could not afford the repayments on an interest only mortgage.

I appreciate any advice anyone can give us

Many Thanks in advance

herbiesjp

Your incomes will allow for a higher mortgage than £150k - however affordability on your part would have to be looked into first. This might lower the amount you would have to raise from other sources.

meanmachine_2

Well affordability is blown out of the water by the fact that you're taking out an interest only mortgage.

It's complex and rather worrying hotchpotch deals like this which contribute to such ridiculous house prices in London. Stupid banks.

Anyway, rant over. In answer to your question, how are you going to afford the repayment part? Or are you banking on pay rises?

what happens to you if you split from your partner? Or your partner's dad dies?

I think the average relationship now lasts about eight years.

why don't you just lower your expectations and seek out a broker who will give you a mortgage on, say, four times your joint income? If you're sleeping together, you only need a one bed anyway.

dccarm

There is no gift tax to worry about, although there is potentially an Inheritance tax if your partner's father dies within 7 years (from my memory of tax laws - I could be wrong!). Your main concern however should be how you are going to pay back the mortgage if you are struggling to meet the payments on an interest only loan.

FaTB

My advice would be don't do it !!

Why buy in a falling market ?

Read either of these two sites then make a more informed decision on whether now is a good time to buy, I believe these sites saved me from many years of financial hardship and misery.

http://www.firsttimebuyerhelp.co.uk/
http://www.housepricecrash.co.uk/

nicki_bee

Thanks for all your replies. In answer to some of your questions, yes we both hope to have good pay rises over the next few years so we can afford the repayment part of the mortgage eventually. I probably didnt word what i was saying very well, but its not that we couldnt afford the repayments on an interest-only guarantor mortgage at 5.99%, we could stretch to it if we really had to, but on a £250,000 mortgage we'd be paying back £300 a month more than if we could get the rate on some of the other fixed rate mortgages weve seen, like the Scarborough 3 yr fixed at 4.49%, so it seems much better to me if we could get a lower rate by getting the largest mortgage we can ourselves, and then borrowing the rest off my partners dad. My partners dad has also talked about contributing 25% of the total mortgage repayments if we need him to, the once we eventually sell getting a 25% share of any profits.

Obviously if me and my partner spilt neither of us could afford to repay the mortgage on our own but surely this is the case for most couples that buy together, we'd just have to sell up. If my partners dad died and we were subject to inheritance tax (I have no idea how much this is) I'm positive my partner would receive other inheritance money which would cover the costs of this tax.

zzzLazyDaisy

If it is tax advice you are looking for, you may get more detailed tax based replies if you put your query onthe tax saving board.

I am not a tax expert, but AFAIK, any gift to you by a parent becomes tax exempt after 7 years. If the donor dies before 7 years it is subject to IHT on a sliding scale. But, as you say, bf would probably inherit other money at that point, so you would have the money to pay the tax.

Doing it that way would give you a sizeable deposit, and leave you free to sort out your own mortgage arrangements.

If there is a third party to the morgage, there is CGT implications for the person who does not live in the house (if it is your principal residence it is tex exempt). CGT would be paid at 40% of the rise in value on their share of the house between purchase and subsequent sale. Less the annual CGT allowance for the year of sale. There is also a tapering relief which cuts the tax a bit more. The point is, the tax is paid ONLY on their share of the profit, after these allowances and reliefs are taken into account.

It maybe, therefore, that over time, you can buy back their share, bit by bit, thus using up the annual CGT allowance each year, and gradually owning more of the house yourself, so that when you do come to sell, you get the benefit of the principal residence exemption on the whole of the profit (course, if prices fall and you go into negative equity, tax won't be the problem............)

Just one further thought - if father is in good health and likely to last more than 7 years, and if this money is a gift rather than a loan, it might make good tax saving sense to give you the money now, to avoid paying IHT later, when father eventually goes?

But, as I say, you'd do better to check these things out on the tax board.

nicki_bee

Thanks for that - I'll post on the tax board as you suggested

cheers