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Hi Guys,
Bit of a strange one but....
My parents have decided to move permanently to their bungalow in Spain. They've offered to sell me their house, but instead of me paying a mortgage, they've said I can pay them an agreed amount monthly for the next 15 years, which would equate to the value of the house (no interest). I have a few concerns which I'm struggling to find info about.
As I have a brother, should my parents pass away, the remainder of what I owe would be split between us as part of our inheritance. How do we make this legal and is this possible?
Secondly, my parents would be using our monthly payment to supplement their pensions, but this isn't an income as such, as it's the proceeds from the sale of their home. How do they avoid paying income tax on this money?
Are their any other pitfalls we need to be aware of.
Much apreciated,
Leon
So your parents sell you the house at full market value £x. They loan you £x, placing a charge on the property with a formal agreement to repay £1000 per month on the capital, 0% interest. Tax implications:
- Stamp Duty: you pay based on £x purchase price (may be 0 Stamp Duty if its below the FTB stamp duty thresholds)
- CGT: parents pay based on £x sale price (may be 0 CGT if parents have always lived there)
- Income tax: The monthly £1000 are just capital repayments, tax is only due on the interest income which is 0.
- Inheritance tax: the full value of the loan £x will remain part of parents' estate, so will pay IHT on the full amount.
- Council tax etc: Your responsibility
-My brother's ok with it, he couldn't afford to buy the house anyway. My parents aren't giving me anything, just saving me the interest, which would just go straight to the bank.
Ofcourse they are giving you something, a free loan. They could instead invest that money, to get a return comparable to the mortgage interest you're saving. Or, they could put it in an easy access bank account / ISA / fund to get some interest as well as keep the opportunity benefit, that if they ever need the money they don't have to borrow themselves e.g. for repairs to their Spanish home, retirement expenses..0 -
So your parents sell you the house at full market value £x. They loan you £x, placing a charge on the property with a formal agreement to repay £1000 per month on the capital, 0% interest. Tax implications:
- Stamp Duty: you pay based on £x purchase price (may be 0 Stamp Duty if its below the FTB stamp duty thresholds)
- CGT: parents pay based on £x sale price (may be 0 CGT if parents have always lived there)
- Income tax: The monthly £1000 are just capital repayments, tax is only due on the interest income which is 0.
- Inheritance tax: the full value of the loan £x will remain part of parents' estate, so will pay IHT on the full amount.
- Council tax etc: Your responsibility
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Ofcourse they are giving you something, a free loan. They could instead invest that money, to get a return comparable to the mortgage interest you're saving. Or, they could put it in an easy access bank account / ISA / fund to get some interest as well as keep the opportunity benefit, that if they ever need the money they don't have to borrow themselves e.g. for repairs to their Spanish home, retirement expenses..
Thanks for the info, very informative. They have a nestegg in the bank so wouldn't ever need to borrow anything in Spain for property repairs. Should something major happen in the future, which meant they did need the money immediately, for say, medical reasons for instance, I assume I could take a mortgage out on the property to pay them back.0 -
It's Spanish income tax that they need to be thinking of, since they'll be Spanish residents, but it's very unlikely repayments of a 0% interest loan will be viewed as income.Secondly, my parents would be using our monthly payment to supplement their pensions, but this isn't an income as such, as it's the proceeds from the sale of their home. How do they avoid paying income tax on this money?
Why would it need to be "documented"?theartfullodger wrote: »How were you going to arrange that with Land registry? How will the regular payment be documented?
Ownership will change from parents to OP - LR reflects that.
The parents will not putting a charge on the property, I presume, so nothing lodged for that.
Nothing to do with "applying". That's just whether they can reside there legally. For tax purposes, they're residing in the country they spend at least half the tax year in. Their assets will fall under whichever IHT regime the assets are in - so their Spanish property will be under Spanish inheritance law, the outstanding balance of the loan will be under UK.
They haven't yet, but I will make sure they do. They're currently classed as UK residents, but are going to apply for residencia in Spain this year. Cheers for the help. Much appreciated.Completely off topic... but if your parents own that bungalow in Spain (or have other assets in Spain) have they taken advice on Spanish Succession law?
If they don't set up things correctly, they can find that Spanish law overrides their wishes in their UK will. (I know of a 'complicated' family that was torn-apart because of this.)
As a rough rule of thumb, if you owe £100k on the loan, and your parents leave £300k in Spain, then you'd be due £100k from the Spanish assets, since their total assets are £400k to be divided equally between two.
I presume they've considered brexit implications around healthcare, as well as exchange rate fluctuations.0 -
Only with difficulty if your parents already have a mortgage on the property for their loan.
My parents own the property outright, so the 'loan' they would be giving me would be completely on paper, or at least, we're hoping that's out it will work. I assume they don't have to physically loan me the cash, for me to then give the cash back to them to purchase the property.0 -
It's Spanish income tax that they need to be thinking of, since they'll be Spanish residents, but it's very unlikely repayments of a 0% interest loan will be viewed as income.
Why would it need to be "documented"?
Ownership will change from parents to OP - LR reflects that.
The parents will not putting a charge on the property, I presume, so nothing lodged for that.
Nothing to do with "applying". That's just whether they can reside there legally. For tax purposes, they're residing in the country they spend at least half the tax year in. Their assets will fall under whichever IHT regime the assets are in - so their Spanish property will be under Spanish inheritance law, the outstanding balance of the loan will be under UK.
As a rough rule of thumb, if you owe £100k on the loan, and your parents leave £300k in Spain, then you'd be due £100k from the Spanish assets, since their total assets are £400k to be divided equally between two.
I presume they've considered brexit implications around healthcare, as well as exchange rate fluctuations.
If they want to legally spend more than 3 months a year in Spain, they have to apply for a residency card, which means being able to prove income etc. They have friends and family who have lived in Spain, some for over 20 years, so I'm pretty sure they're aware of the rules. I believe, as pensioners, once they have residencia, they're entitled to healthcare. How Brexit will affect this I don't know, but I doubt very much that they're going into this with closed eyes.0 -
Yes, but as suggested above it may be sensible for them to require you to grant them a charge over your property in security of the sums you're repaying them. That would then get in the way of another lender also wanting a charge over the property, as generally lenders like to have the first (and only) charge over the secured property. Though if they were desperate for the cash they may be prepared to discharge their security in order that you can get more funds elsewhere.My parents own the property outright, so the 'loan' they would be giving me would be completely on paper, or at least, we're hoping that's out it will work. I assume they don't have to physically loan me the cash, for me to then give the cash back to them to purchase the property.0
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