Buying part of parents house

ent_moot wrote: »

Currently the value of their home is well below the threshold. I was thinking of paying their mortgage under a zero service charge zero interest loan, which I will "hand craft" rather than involve a solicitor. So, it's essentially a gift but if push comes to shove over inheritance thresholds etc. then it's a loan. Do you think this will work?

Certainly paying their monthly mortgage payments for them as they fall due (at only 1.1%) is better than borrowing a large chunk of money on your existing property (at greater than 1.1%) to pay off their debt. Your family as a whole will get a better overall financial result if you pay the bare minimum amounts that need to be paid on their 1.1% mortgage giving you more money to clear your own mortgage at greater than 1.1% or make investments (whether inside or outside a pension) at a long term rate of much greater than 1.1%.

You can agree and document a loan facility with your parents that charges them zero percent interest on the money they borrowed each month. You can't secure it as a first charge on their house while they still have a mortgage in place, because their existing mortgage lender already has that security and as discussed there is no point paying him off. But you could register a second charge i.e. subordinated to the rights of the mortgage lender. Having a charge on the house ranks you ahead of other unsecured creditors if/when your parents are pursued for other debts and those creditors want your parents to sell their property to pay them off.

Your parents mortgage will presumably not always be at 1.1% but will likely track changes in base rates or SVRs. And if it is a fixed term deal, that deal will end. So at some future point it is likely that they will need to remortgage to maintain a good deal. At that point, when shopping around for the best rates, they will have to declare their financial position in terms of income, debts to banks and credit card companies and other secured and unsecured borrowings from people such as yourself. In order not to scare off a prospective mortgage lender, you would not want any part of your debt to be repayable monthly or on demand , but only at some later point after the mortgage is cleared (such as on sale of their property). So, a registered second charge on the house using appropriate language in the loan documentation would make sense.

Others have mentioned pension as a sensible vehicle for part of your spare money. Obviously it does not help with the cash you'll need in retirement between your giving up work in early to mid 40s and being able to access a personal pension in your late 50s. However, it would certainly help with your cashflow needs starting from your late 50s for potentially four to five decades after that.

15% of your salary over four decades of a career would put you well on the way to a healthy pension. However, you're not planning to contribute 15% over four decades of a career, only for two decades because you want to retire early - and once you stop having salary/business earnings you will only be able to put a nominal amount into a pension each year. So, even with a decent salary making those 15%s quite respectable, don't underestimate the value of taking significant tax relief on extra amounts you put in. Especially as your salary rises over the coming years and you stand to have your annual personal allowance taper away giving you an effective 60% tax rate - equating to 150% 'bonus' on any funds contributed to pension that year within the relevant boundaries.

The other positive thing about a pension is that it is outside your estate for inheritance tax purposes. You mentioned your parents' assets being well under the IHT threshold at the moment. That situation would also be helped in the future due to rule changes where one can give a part of their residence to a child (but not to a parent) on top of the regular IHT allowance. However, have you considered the IHT applicable to *your own* estate?

At the moment you have getting on for £300k of assets and being frugal you will hope to accumulate more at a fast pace. And the money given to your parents by way of loan will not reduce your estate because it's still yours, albeit you don't necessarily expect to get it back. It's worth considering the money that will get 'lost' to the treasury when you get hit by a bus and IHT is due on what you have in your estate.

For example if you have £300k equity in your home now and spend the next few years paying off your mortgage and funding your parents' property by way of loan, before focussing on investments and extra pension, you might find yourself with (say) a £500k home mortgage free, £30k parental loan, £10k investments, £10k extra pension: £550k. When you get hit by a bus, your parents as executors find your estate to be £225k over the £325k IHT threshold. They need to pay 40% of tax to HMRC on that excess which is a £90k tax bill. They would get £440k left over, a nice windfall - but less value than the home for example, so no opportunity to give the home away intact to anybody, let it out for income, etc.

Alternatively if you had invested the money wisely in investments and pensions instead of paying down your cheap home mortgage they might find you owning £370k of home equity, £30k parental loan, £125k investments £125k pension for a total of £650k ; the extra hundred grand over my unspecified timescale coming from high rate tax relief on the pension and the growth on the pension and investments well in excess of the mortgage interest rate saved. But the pension is outside the estate for tax purposes so total estate for IHT is only £525k not £650k.

This produces an IHT bill of £80k on the £200k over the £325k threshold. After the bill is settled out of the liquidated investments, the beneficiaries are left with £650k-£80k = £570k. Enough to give flexibility for a sibling or friend or lover to be given your property intact, if your parents don't want to keep it or sell it for cash. Overall there's almost 25% more money coming out of the estate, made possible by a) income tax relief on pension investment; b) greater gains on the pensions and investments compared to overpaying mortgage; c) lower IHT bill due to the pension assets sitting outside the estate.

I realise planning your own estate's IHT is well off topic for 'how do I buy my parents house or help them with their mortgage' but once you start looking at potential outcomes when considering aggregate family wealth, it has to be a consideration.