Implications of Buying Parents House

Last post Tue, Jun 19 2007, 1:20 PM by sparkysdad. 8 replies.
Sort Posts: Previous Next
  •  Tue, Jun 19 2007, 1:20 PM

    Re: Implications of Buying Parents House

    Not all equity release schemes have rolling interest - some offer a straightforward discounted sale price - for example a 50% share of a house valued at £200,000 for £75,000 so the remainder of the property still gains value, and can be willed in the usual way.

    The most practical solution would be to buy a stake in the parental house - preferably with all siblings and future will contestants signing their agreement to reduce future conflict possibilites. This could be done by joint mortgage or extending the loan on another property - the issue becomes the potential risk to either or both properties should your circumstances change..

    The seemingly obvious solution would be to buy the property outright, either on your own, or with any co-beneficiaries. Your parents could make a gift of the deposit, leaving you to find a mortgage only for the remainder, assuming you purchase on a buy to let, there is no reason on earth why you can't let to your parents, though you should not express that intention when looking for the loan perhaps. Your parents would have the cash lump sum to invest elsewhere, and you would receive a rental income to cover the purchase... As long as you can show the probable rental value is sufficiently high to support the borrowing amount, there is no compulsion to charge the full rent just a "reasonable" one.. so you could charge sufficient to cover the repayments each month.. offsetting income against interest only mortgage to avoid tax.

    Come the day when your parents are no longer able to live in the house, or have passed on you would be liable for CGT on the profit, though you could technically switch residences long enough to declare the house as your primary residence and then sell in the usual way, and pay no tax.

    Somewhat unorthodox, but thousands so it every year.

    • Post Points: 5
  •  Tue, Jun 19 2007, 12:35 PM

    Re: Implications of Buying Parents House

    Hello Louise,

    I am new to this site so please bear with me !

    My folks are retired, house paid off and looking to release some funds. We have spoke at length about the options.

    One option that came up was for the house to be transferred to myself then I pay them an amount each month. There would be no additional mortgages only a straight payment from myself to them each month. This payment would increase each year. The intention would be for the payments to continue for 25 years or until they both die. Obviously the necessary paperwork would need to be drawn up to protect the agreement.

    The size of the payment would be based on a calculated mortgage repayment minus an agreed amount of rent, but ultimately my folks would receive a regular monthly income and still live in their own house.

    One of their concerns is that should they ever find themselves requiring care then the value of the house, currently in their name, could be used. They would like to transfer their property to safeguard this possibility.

    I would be grateful for any comments on the above and also if their was a Capital Gains liability.

    Many thanks

    • Post Points: 20
  •  Fri, Jun 15 2007, 2:23 PM

    Re: Implications of Buying Parents House

    Hi - sorry if I have confused you.

    Your parents could apply for a normal mortgage (as long as age restrictions met Lender criterium) or a 'lifetime mortgage' (commonly known as equity release.

    However when you asked about a 'secured loan' - I assumed you meant a second charge loan such as those advertised by First Plus. It is this type of borrowing that is not available to your parents.

    If they want to look into a normal mortgage - Lenders would assess affordability based on your parents income (even if you pay) as they are legally responsible for the borrowing. In addition, most Lenders have amaximum age restriction of between 65 and 80 years old which will restrict the term you can apply for the mortgage over - and that will affect the payments.

    i hope that clears up the issue and, once again, apologies for the confusion.

    • Post Points: 5
  •  Fri, Jun 15 2007, 2:04 PM

    Re: Implications of Buying Parents House

    Louise, so there is no way for them to take out a mortgage or other secured loan on their property for any purpose? Surely the only option for borrowing against the house can't be an equity release scheme?
    • Post Points: 20
  •  Fri, Jun 15 2007, 9:35 AM

    Re: Implications of Buying Parents House

    Hello again! Seured loans are not available on a property that does not have a first mortgage - so that option would not be available.

    • Post Points: 20
  •  Fri, Jun 15 2007, 9:16 AM

    Re: Implications of Buying Parents House

    Thanks Louise. What about the option of my parents taking out a secured loan against the house that they pay for each month and I reimburse them the repayment?

    • Post Points: 20
  •  Fri, Jun 15 2007, 6:41 AM

    Re: Implications of Buying Parents House

    Good morning (well - not so good here, grey and wet!)

    Looking at the first option of you buying the house at 'undervalue' and letting your parents remain as rent free tenants. This would not appeal to any Lender if you were to raise the mortgage on your parents' house. They could not view the property as a Buy to Let - as there is no Shorthold Tenancy Agreement with the required level of rent to repay the mortgage - and virually no BTL products allow relatives as prospective tenants anyway.

    A second option would be to raise the £50,000 on your property by increasing your mortgage (if you have the equity) and then in effect you would buy your family home for cash.

    However - the transaction may have all sorts of implications you have not considered. Firstly tax - although your parents will not pay rent, you may find the revenue assess the situation as if you are receiving the full market rent and levy tax anyway; there will certainly be capital gains tax to pay when you sell the house because it is not your residence. I would certainly recommend you seek advice on all these matters from a tax expert.

    In addition - the legal and personal implications. You will have taken on an additional mortgage burden - so you need to be clear how this will be factored in when agreeing the inheritance split between you and your brother - a potentially difficult area.

    Finally - I would agree with conmankiller - lifetime mortgage schemes are certainly not right for everyone and you would need to investigate this option very carefully before proceeding. The main issue is that interest 'rolls up' - so the £50,000 borrowed would just grow and so keep reducing the equity in the property. The alternative is for your parents to look at downsising if they could find a smaller prperty they would be comfortable in for about £100k - to release some funds, downsize household bills - and still have an asset of £100k that will go up - instead of an asset of £130,000 (after borrowing £50K) that will go down.

    Sorry this is so long!

    • Post Points: 35
  •  Thu, Jun 14 2007, 2:17 PM

    Re: Implications of Buying Parents House

    A simpler cheaper less complicated way, with less tax implications would be for you to raise 50k perhaps by remortgaging your own property, then lend that to your parents, allowing them to still live in their house rent free.

    Your parents and you could then draw up a legal loan agreement between yourselves, noting the money is to be repaid to you from the sale of their property when it's left to you and your Brother, with your loan being repaid firstly, then the balance left shared out equally afterwards between you and your Brother (that makes it totally fair).

    Equity release schemes are to be avoided in cases where your parents want to leave an inheritance, as the chances are there would be hardly any, or no equity left for them to leave, when that time comes.

    There will be no inheritance tax liability if their total estate is less than £285k each, when they die. And Capital gains tax would not be due, as there has not been a taxable gain, also doing the above avoids stamp duty as no property has changed ownership.

    As for the alternative of your Parents taking out the mortgage, that I am not too sure about, but one of the mortgage specialists may respond to that soon.

    • Post Points: 5
  •  Thu, Jun 14 2007, 12:41 PM

    Implications of Buying Parents House

    My mum and dad own their house outright. They are both at retirement age and want to generate some additional cash. They have thought about an equity release scheme but are put off by the reports they have heard about how much will be due when the time comes to settle and the potential impact that will have on their childrens (me and my brother) inheritance.

    As an alternative they have asked if there is a possibility that I could buy their house. I would pay the mortgage and they would live there rent free. The house is worth about £180,000 and they only want about £50,000. I am their son and I own my own house.

    Is this doable, and what are the financial implications on both parties? Inheritance tax, stamp duty, captial gains etc. Is this worth me doing or would they be better off with an equity release scheme?

    As an alternative, what if they took out a mortgage in their name that I gave them the money to pay for?

    Thanks for any help

    • Post Points: 35