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Questions on Approaching a Purchase at an Undervalue

shaminc3
shaminc3 Posts: 6 Forumite
in House buying, renting & selling
Hi,

For context: My parents own two homes, one which is their residential home and another which is a BTL. Their intention is to sell the residential home to me at an undervalue (i.e property is worth c.£500k but they are willing to sell it to me for £280k). They want to sell the property for this amount to wipe out the mortgage on it and use the remainder to reduce the mortgage on the BTL and then change that BTL into their residential property.

I understand that their will be questions of Inheritance tax, Deprivation of Assets and potentially CGT (but as they are selling their residential home, I don't think this to be an issue?). As they will be gifting the difference between actual market value and the purchase price (most likely with a Letter to state it is a gift), can I use this gift as a deposit in conjunction with my own cash amount?

Next question is, will there be other stumbling blocks along the way to a transaction of this sort? Especially with such a sizable undervalue in this case. I'm just wondering about further tax issues that I haven't contemplated and the barriers to making this happen as it can be quite complex.

Thanks for any guidance!

Comments

  • G_M
    G_M Posts: 51,977 Forumite
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    shaminc3 wrote: »
    I understand that their will be questions of Inheritance tax,yes on the gifted element) Deprivation of Assets possibly on the gifted element)and potentially CGT No. As they will be gifting the difference between actual market value and the purchase price (most likely with a Letter to state it is a gift), can I use this gift as a deposit in conjunction with my own cash amount?
    Yes

    Next question is, will there be other stumbling blocks along the way to a transaction of this sort?Especially with such a sizable undervalue in this case.
    don't see why


    I'm just wondering about further tax issues that I haven't contemplated and the barriers to making this happen as it can be quite complex.
    SDLT on your purchase will be based on the consideration paid - £280K
  • 00ec25
    00ec25 Posts: 9,123 Forumite
    Combo Breaker First Post
    G_M wrote: »
    SDLT on your purchase will be based on the consideration paid - £280K
    no it would not. There is an undervalue, they are connected persons

    the minimum consideration rule applies

    https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm21560
  • G_M
    G_M Posts: 51,977 Forumite
    Name Dropper First Anniversary First Post Combo Breaker
    Ah - sorry. Connected persons.:T
  • shaminc3
    shaminc3 Posts: 6 Forumite
    So in this situation I would be liable for SDLT at the genuine market value of the property (i.e. C.£525k)?
  • SDLT_Geek
    SDLT_Geek Posts: 2,491 Forumite
    First Anniversary First Post Name Dropper
    edited 25 June 2018 at 7:17AM
    00ec25 wrote: »
    https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm21560


    This minimum consideration rule relates to subsales (or "pre completion transactions" as we are meant to call them now).


    To explain that: If your parents had contracted to buy a property for £525K but sold it straight on to you so you took the transfer, and you paid only £280K then your parents would have probably been able to get "pre completion transaction relief" and pay no SDLT. You however do not pay SDLT on the £280,000 you pay for the property. You pay it on the £525K. That is where this minimum consideration rule fits in.

    There is another market rule (Finance Act 2003 section 53) when a person transfers a property to a company connected with the person, but that does not apply here.


    It seems to me the SDLT liability will depend on how the lender is comfortable on seeing the transfer documented. Is it happy for the price to be shown as £280,000 so there is a transfer at undervalue on the title? Or does it insist on your parents making you a gift of the shortfall and showing the price as c. £525,000?
  • Red-Squirrel_2
    Red-Squirrel_2 Posts: 4,341 Forumite
    edited 24 June 2018 at 8:26PM
    Will your parents still be living in the house after they sell it to you?
  • G_M
    G_M Posts: 51,977 Forumite
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    Red-Squirrel wrote: »
    Will your parents still be living in the house after they sell it to you?
    Good question except that
    They want to sell the property for this amount to wipe out the mortgage on it and use the remainder to reduce the mortgage on the BTL and then change that BTL into their residential property.
  • Red-Squirrel_2
    Red-Squirrel_2 Posts: 4,341 Forumite
    G_M wrote: »
    Good question except that

    Ah, missed that. Presume they are moving out on completion of the sale then OP?
  • shaminc3
    shaminc3 Posts: 6 Forumite
    Red-Squirrel wrote: »
    Ah, missed that. Presume they are moving out on completion of the sale then OP?

    That is correct, they will move into a different property and have no connection remaining with the one they intend to sell to me for an undervalue.
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