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Buying a house for a family member and repayment of the loan

Hi there,

I'm new to this forum and any help will be appreciated.

My daughter and her boyfriend are planning to buy a house together however their incomes and deposit are not enough to get a mortgage to buy the house they want.

As parents, we decided that we will buy the property outright and they will repay us monthly (no interest will be charged). We, however, want some guarantees that the loan will be completely repaid.

What are the implications of the following options:

1) We keep the property in our name until the full loan (interest free) is repaid. It will be a second house so do we have to pay capital gain tax at the date of the transfer of the property? Can we avoid the repayments being considered as “rent”? Is there any other tax that we would be liable for?
Also, can we keep the house in our name but avoiding to pay any tax as "at the end of the day" who will be living in the property will be my daughter and her boyfriend?

2) The property is in my daughter and her boyfriend’s names but we agree on a private mortgage between us. Can we recover the loan selling the house if they stop paying? Is there any other contract that we could take into account (i.e: deed of trust, private leasing) in order to able to recover the loan? How easy will be to recover any oustanding repayment?


Thank you
«1

Comments

  • poppysarah
    poppysarah Posts: 11,522 Forumite
    victor2011 wrote: »

    My daughter and her boyfriend are planning to buy a house together however their incomes and deposit are not enough to get a mortgage to buy the house they want.



    Are you fabulously wealthy? Do you pee money?
    What if they split up? What if she leaves him in the house? What if he has someone else in the house after they break up?

    Are you going to be their landlord? Do you know the tax situation on any income from the 'rental'?

    What if they want to do improvements? Who'll pay for them? Who'll pay for repairs?

    Do you have other children who would also want a house buying for them?
  • G_M
    G_M Posts: 51,977
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    victor2011 wrote: »
    Hi there,

    What are the implications of the following options:

    1) We keep the property in our name until the full loan (interest free) is repaid. It will be a second house so do we have to pay capital gain tax at the date of the transfer of the property? Can we avoid the repayments being considered as “rent”? Is there any other tax that we would be liable for?
    Also, can we keep the house in our name but avoiding to pay any tax as "at the end of the day" who will be living in the property will be my daughter and her boyfriend?
    You will own the property. The kids are paying you to live there. You will be landlords, with all the responsibilities of landlords including income tax, capital gains tax etc

    2) The property is in my daughter and her boyfriend’s names but we agree on a private mortgage between us. Can we recover the loan selling the house if they stop paying? Is there any other contract that we could take into account (i.e: deed of trust, private leasing) in order to able to recover the loan? How easy will be to recover any oustanding repayment?


    Thank you
    2) put a charge on the property, just as a bank would. The property then cannot be sold without your consent, and if repayments stop, you can repossess.

    You'll need a solicitor to set up a water-tight agreement and set up the Charge.
  • zzzLazyDaisy
    zzzLazyDaisy Posts: 12,497
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    G_M wrote: »
    2) put a charge on the property, just as a bank would. The property then cannot be sold without your consent, and if repayments stop, you can repossess.

    You'll need a solicitor to set up a water-tight agreement and set up the Charge.

    If you go down this route, I would suggest that you buy the house in your daughter's name only, because if you buy it in joint names, and they later split up, the bf may stop paying the loan, but would still be entitled to his share of the house when it is later sold. So make sure that you consider this eventuality and ask the solicitor to put something in the agreement to protect your daughter if possible.

    Another way to deal with it would be to buy the house as 'tenants in common' with her having (say) 99% and him 1%, perhaps with a clause in the agreement that no changes to the shares can be made until the loan has been repaid. However, if he is going to be making an equal contribution to the repayments, he may object to this as his contribution would not be reflected in his share.

    The other way to do it is to let them use their own savings to pay the deposit, and to get a mortgage, and to gift them the shortfall of the deposit, to enable them to buy the house themselves. You can protect your share of the deposit by having this reflected in a tenancy in common. Yes it would mean this would be a gift - but it would also mean that much less of your savings are tied up in their house for a long time to come, and losing interest for the next goodness knows how many years.

    Just some thoughts

    Dx
    I'm a retired employment solicitor. Hopefully some of my comments might be useful, but they are only my opinion and not intended as legal advice.
  • [FONT=&quot]Hi everyone,[/FONT]

    [FONT=&quot]First of all Happy New Year![/FONT]
    [FONT=&quot]Thank you for the time you dedicate to replying to our queries.[/FONT]

    [FONT=&quot]Over the past week we’ve been studying different ways of buying the house.[/FONT]

    [FONT=&quot]The main concern is whatever happens in the future (my daughter and her boyfriend split up, they stop paying us, they want to sell the house, etc) we will be able to recover the entire amount invested without having to pay taxes (not to say unfair). [/FONT]

    [FONT=&quot]So keeping the concept of “total reimbursement” in mind we considered:[/FONT]

    [FONT=&quot]1) [/FONT][FONT=&quot]We keep the house in our name until all the installments have been paid. However, we don’t want the repayments to be considered as “rent”, as they are just repayments of a loan (without interest charged). Also, we wouldn’t really be acting as landlords as all the charges (renewal, improvements, council tax, etc) will be paid by my daughter and boyfriend (as per contract). So to say the possession will be immediately transferred to them but the ownership at the end of the repayments.
    [/FONT]
    [FONT=&quot]Queries: [/FONT]
    [FONT=&quot]A) [/FONT][FONT=&quot]Can we avoid paying tax on the repayments? They are not rent.
    [/FONT]
    [FONT=&quot]B) [/FONT][FONT=&quot]We found out there’s an installment sale agreement one the ehow website, should we take this into account?[/FONT]
    [FONT=&quot]C) [/FONT][FONT=&quot]What happens in terms of capital gain? It would be second house for us but the selling price (to my daughter and boyfriend) would be the same as the purchase price.
    [/FONT]

    [FONT=&quot]2) [/FONT][FONT=&quot]The house is bought in my daughter and boyfriend names (50%-50% [/FONT]as they would be making an equal contribution to the repayments[FONT=&quot]) and we act as lenders.[/FONT]

    [FONT=&quot]Queries:[/FONT]
    [FONT=&quot]A) [/FONT][FONT=&quot]Are there restrictions to make a loan without interest?[/FONT]
    [FONT=&quot]B) [/FONT][FONT=&quot]If we put a “charge on the property” as suggested above, can we be 100% sure that in any occasion the property cannot be sold without our consent? How easy is it to repossess the house and recover the money invested?[/FONT]
    [FONT=&quot]C) Are we going to pay any tax on the loan repayments?
    [/FONT]
    [FONT=&quot]In terms of costs which one of the 2 options above is the cheaper?[/FONT]

    [FONT=&quot]Thank you again![/FONT]
  • I agree with zzzLazyDaisy. It'd be a much cleaner arrangement to simply lend the shortfall in their deposit (while at the same time nudging them towards a cheaper house). Let them arrange the mortgage and take full responsibility for the property.
  • G_M
    G_M Posts: 51,977
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    victor2011 wrote: »
    [FONT=&quot]Hi everyone,[/FONT]

    [FONT=&quot]First of all Happy New Year![/FONT]
    [FONT=&quot]...[/FONT]

    [FONT=&quot]The main concern is whatever happens in the future (my daughter and her boyfriend split up, they stop paying us, they want to sell the house, etc) we will be able to recover the entire amount invested without having to pay taxes (not to say unfair tax? unfair? can of worms!). [/FONT]

    [FONT=&quot]So keeping the concept of “total reimbursement” in mind we considered:[/FONT]

    [FONT=&quot]1) [/FONT][FONT=&quot]We keep the house in our name until all the installments have been paid. However, we don’t want the repayments to be considered as “rent”,tough! They will be! as they are just repayments of a loan (without interest charged). If you lend the money to your daughter and she buys the property in her own name, that would be a loan. Also, we wouldn’t really be acting as landlords as all the charges (renewal, improvements, council tax, etc) will be paid by my daughter and boyfriend (as per contract).Sorry - you are landlords. It's your property, and you are taking money off daughter in return for allowing her to live there. The arrangement of 'charges' does not affect this (though be aware of your legal responsibility for repairs etc as landlord So to say the possession will be immediately transferred to them but the ownership at the end of the repayments.[/FONT]

    [FONT=&quot]Queries: [/FONT]
    [FONT=&quot]A) [/FONT][FONT=&quot]Can we avoid paying tax on the repayments? They are not rent.Yes they are. So: income tax on rent and Capital Gains Tax on any capital gain made.[/FONT]

    [FONT=&quot]B) [/FONT][FONT=&quot]We found out there’s an installment sale agreement one the ehow website, should we take this into account? Never heard of it[/FONT]
    [FONT=&quot]C) [/FONT][FONT=&quot]What happens in terms of capital gain? It would be second house for us but the selling price (to my daughter and boyfriend) would be the same as the purchase price.See here[/FONT]


    [FONT=&quot]2) [/FONT][FONT=&quot]The house is bought in my daughter and boyfriend names (50%-50% [/FONT]as they would be making an equal contribution to the repayments[FONT=&quot]) and we act as lenders.[/FONT]

    [FONT=&quot]Queries:[/FONT]
    [FONT=&quot]A) [/FONT][FONT=&quot]Are there restrictions to make a loan without interest? No. You can make any arrangement you want[/FONT]
    [FONT=&quot]B) [/FONT][FONT=&quot]If we put a “charge on the property” as suggested above, can we be 100% sure that in any occasion the property cannot be sold without our consent?That's what a Charge does. How easy is it to repossess the house and recover the money invested?You'd have to get a court order for posession, just like a bank does when a borrower defaults[/FONT]
    [FONT=&quot]C) Are we going to pay any tax on the loan repayments?Only on interest is charged[/FONT]

    [FONT=&quot]In terms of costs which one of the 2 options above is the cheaper?[/FONT]

    [FONT=&quot]Thank you again![/FONT]
    hope that helps.
  • zzzLazyDaisy
    zzzLazyDaisy Posts: 12,497
    First Anniversary Combo Breaker
    Forumite
    I agree with zzzLazyDaisy. It'd be a much cleaner arrangement to simply lend the shortfall in their deposit (while at the same time nudging them towards a cheaper house). Let them arrange the mortgage and take full responsibility for the property.

    Actually that is not what I was suggesting. If part of the deposit is a loan, most (if not all) lenders will deduct the amount of the loan from the figure they are willing to lend, on the basis that the requirement to repay the deposit loan impacts on the affordability criteria.

    On the other hand a gifted deposit, which is not intended to be repaid, is probably unlikely to have a negative impact on the size of the mortgage they are able to obtain. The down side is that this money is a gift. The upside is that it is only part/all of the deposit, and not the total cost of the house.
    I'm a retired employment solicitor. Hopefully some of my comments might be useful, but they are only my opinion and not intended as legal advice.
  • zzzLazyDaisy
    zzzLazyDaisy Posts: 12,497
    First Anniversary Combo Breaker
    Forumite
    edited 3 January 2012 at 5:24PM
    victor2011 wrote: »

    [FONT=&quot]1) [/FONT][FONT=&quot]We keep the house in our name until all the installments have been paid. However, we don’t want the repayments to be considered as “rent”, as they are just repayments of a loan (without interest charged). Also, we wouldn’t really be acting as landlords as all the charges (renewal, improvements, council tax, etc) will be paid by my daughter and boyfriend (as per contract). So to say the possession will be immediately transferred to them but the ownership at the end of the repayments.

    As G_M says.... what you are describing is a Landlord/Tenant situation. It is YOUR house, they are paying you to live in it. The fact that you intend at some point to transfer the house to them does not change that situation. The consequence of this is that if you buy the house you will be liable for tax on the whole amount of the rent (less any expenses, such as repairs, interest on any loan/mortgage used to buy the house, the cost of meeting other landlord obligations etc).
    [/FONT]

    [FONT=&quot]B) [/FONT][FONT=&quot]We found out there’s an installment sale agreement one the ehow website, should we take this into account?[/FONT]

    I know nothing about this type of sale in relation to property. I am presuming it is something like hire purchase for a car or something of that nature? However the law relating to the sale of property is very different from the law relating to the sale of goods, so you would need to seek expert advice on this, and I doubt if anyone on this forum can advise you how this would work in the context of your situation (except, possibly Richard Webster, who is a solicitor and an expert on property related matters)


    [FONT=&quot]C) [/FONT][FONT=&quot]What happens in terms of capital gain? It would be second house for us but the selling price (to my daughter and boyfriend) would be the same as the purchase price.

    [/FONT][FONT=&quot]As far as capital gains tax is concerned, if you later give the house to them (remember this is YOUR house, not theirs) CGT will become payable at the date of the transfer on any increase in value of the house, less the CGT allowance. So if you bought the house in joint names with you and your husband you would have two CGT allowances to offset against the increase in value, and as property prices are not rising much at the moment that increase may not be significant. But no-one has a crystal ball and if property goes through boom period, or the CGT rules are changed, you could end up with a significant CGT bill.[/FONT]


    [FONT=&quot]2) [/FONT][FONT=&quot]The house is bought in my daughter and boyfriend names (50%-50% [/FONT]as they would be making an equal contribution to the repayments[FONT=&quot]) and we act as lenders.[/FONT]

    [FONT=&quot]Queries:[/FONT]
    [FONT=&quot]A) [/FONT][FONT=&quot]Are there restrictions to make a loan without interest?[/FONT]
    No
    [FONT=&quot]B) [/FONT][FONT=&quot]If we put a “charge on the property” as suggested above, can we be 100% sure that in any occasion the property cannot be sold without our consent?
    You can't prevent a sale of the property. What you can do is make 100% sure that the unpaid balance of the loan is repaid to you before any surplus equity is paid to them although of course if the value of the property falls, there may be insufficient equity to repay the money still owed.

    How easy is it to repossess the house and recover the money invested?[/FONT]
    You would need to be prepared for the expense, time, and family stress, of taking your daughter and her boyfriend to court for non-payment of the loan, an order for eviction and repossession, and forced sale of the house. Whether you would get the money back would depend on how much the house is worth at the time. However the court still has wide powers to delay the repossession and give the owners of the house (them) an opportunity to pay off the arrears in installments.

    [FONT=&quot]C) Are we going to pay any tax on the loan repayments?

    If it was an interest free loan there would be no tax (interest is income and taxable). You would of course need to make sure that the loan agreement was water-tight and professionally drafted to cover eventualities such as non-payment etc.
    [/FONT]
    [FONT=&quot]In terms of costs which one of the 2 options above is the cheaper?[/FONT]

    You will have to do the research and the maths, as the variables are considerable depending on how the situation pans out over the years.

    [FONT=&quot]Thank you again![/FONT]

    To be honest I really think you need to take legal advice on the various scenarios before making any decision, because you really need to be sure that you understand all the potential consequences of each decision, including what might happen if things do not pan out as you hope/expect.

    I'd also be concerned that they don't appear to have saved a deposit or be financially able to obtain a mortgage or basically stand on their own two feet and take responsibility for putting a roof over their own heads (a little parental help is a long way from taking over and handing it them on a plate...). In which case, is the responsibility of owning their own home really the right thing for them at this stage in their lives? But I guess you've thought all that through...
    I'm a retired employment solicitor. Hopefully some of my comments might be useful, but they are only my opinion and not intended as legal advice.
  • Caroline_a
    Caroline_a Posts: 4,071 Forumite
    I have no words regarding the legalities of buying the house for your daughter and her boyfriend, but I would recommend you read through some of the threads in the board on here that deals with relationships. People can be horrible, and breakups happen all the time.

    Before you lay out a penny you need to look at the worst case scenario - daughter and boyfriend split up, she comes running back to you, he stays in the house and systematically reduces it to rubble. Sound crazy? yes, but people are crazy. And this board is full of exes doing things that has taken their previous partner by surprise, if not total shock.

    Caveat emptor has a few meanings in this case!
  • Scotchnan
    Scotchnan Posts: 37 Forumite
    If they can't afford it then will they be able to afford to repair it?
    What if they decide it's your house and you should repair it?
This discussion has been closed.
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