Help: Buying Dad's House for cash to rent back to him prior to sale?

[paulwdn]

My Dad wants to sell my wife and I his house for the remaining cost of his mortgage. i.e. His mortgage has roughly £11,000 outstanding and he wants us to pay this and transfer the house into our names. We already have our own house so the plan then would be to leave my Dad living in his house and he wants to pay us rent for a year or so until he finds somewhere else to live.

So effectively we are looking at a buy-to-let with my Dad as the tenant for a year. After he moves out we will be selling the house (after a lot of work – roofing –window etc).

I have been trying to navigate my way through the taxation laws to find the best way to go about this but every example I can find talks about the effect of actions against a buy-to-let mortgage. We will be paying the £11,000 outright with a long term loan (I know we will have to say the money is for house repair etc).

Does anybody have any suggestions on the best way to go about this venture. I’m not after detailed explanations but if somebody could point me in the right direction it would help. The main aim is to reduce any taxation costs.

I have been reading about setting up a small company with my Dad’s house as a business purchase to rent (to him). Also, the purchase will involve my Sister as well so if she is added to the paperwork can I make use of her capital gains tax allowance in the final sale.

Any help in the right direction would be brilliant

Thanks

Paul

[jeffrey]

The following is NOT tax advice (await an expert) but explains a few points about how the conveyancing might proceed.
1. If father (F) sells to you/wife (H/W), the price actually paid may affect its future saleability- esp. if the sale is at a visible undervalue.
2. So perhaps F should show the full market value as the price. If that exceeds £125 000, on the other hand, SDLT would be payable.
3. Out of the sale price, F will anyway discharge the mortgage debt- this is the role of V, not P.
4. Will F (as tenant) be seeking HB/LHA? There are rules against 'contrived' tenancies.

[Telometer]

How do you think this convoluted idea is going to save you - rather than cost you - tax? What is your real motive for this scheme?

(It doesn't work, by the way, not at all.)

[jeffrey]

Simpler: lend F the amount needed to discharge his existing mortgage. He executes a private Mortgage Deed in favour of H/W, registered at HMLR (whether interest-free or not) to protect H/W's investment. This causes none of the potential problems such as 'undervalue sale' or SDLT obligations.

[paulwdn]

The following is NOT tax advice (await an expert) but explains a few points about how the conveyancing might proceed.
1. If father (F) sells to you/wife (H/W), the price actually paid may affect its future saleability- esp. if the sale is at a visible undervalue.
2. So perhaps F should show the full market value as the price. If that exceeds £125 000, on the other hand, SDLT would be payable.
3. Out of the sale price, F will anyway discharge the mortgage debt- this is the role of V, not P.
4. Will F (as tenant) be seeking HB/LHA? There are rules against 'contrived' tenancies.

Thank you for the advice regarding future saleability. If he does show the full market value (which in the current disrepair of the house is well under £100,000) how would that work in terms of our purchase. My Dad doesn't want the full market value for the house from us - he just wants us to pay off the remainder of the mortage so we can have the house. He is not looking for any gain in this - he is just being generous.

My Dad will not be seeking HB/LHA. He will remain in the house just until he finds somewhere else whilst paying rent to us. This is all his idea and how he wants to proceed (i.e. cost of sale and paying rent afterwards).


How do you think this convoluted idea is going to save you - rather than cost you - tax? What is your real motive for this scheme?

(It doesn't work, by the way, not at all.)

I'm confused by your comment. We have not come up with the idea to save tax. We are in the situation described above and with little knowledge of the area are just looking for guidance on how best to go about things. If it doesn't work then what does?

Paul

[Telometer]

I repeat "What is your motive for this convoluted scheme?"


You make the point that you want to minimise taxation costs, but if you don't go through with any of this fandangle you are unlikely to incur any tax at all.

[paulwdn]

Simpler: lend F the amount needed to discharge his existing mortgage. He executes a private Mortgage Deed in favour of H/W, registered at HMLR (whether interest-free or not) to protect H/W's investment. This causes none of the potential problems such as 'undervalue sale' or SDLT obligations.

I must admit that I haven't a clue what this would entail and exactly how it works. Is there a site you can point me towards to read more about this method. I'm going to use google and the HMLR site to try and find some further information about it myself.

Thanks

Paul

[paulwdn]

I repeat "What is your motive for this convoluted scheme?"


You make the point that you want to minimise taxation costs, but if you don't go through with any of this fandangle you are unlikely to incur any tax at all.

Well the motive for my Dad is to give us his house with no gain to himself. The motive for myself, my Wife and my Sister is to own the house with a view to renovation and sale in the future. You say that if we don't go about it this way we won't incur any tax at all but I don't know of any other way to go about it. I am open to any advice.

Paul

[Telometer]

Your father could do the renovation and he would not incur any taxable gain. (Probably.)

[paulwdn]

Your father could do the renovation and he would not incur any taxable gain. (Probably.)

But we would still be purchasing the house from him at £11,000 regardless of the current market value (pre or post renovation).

From what I have been reading I may be able to have a tax reduction for any REQUIRED building work I complete after my Wife and I get the house. When I have used the word 'renovation' I have meant to say wholly necessary building work (roofing/windows/electrical etc) rather than just painting and decorating. Again, I am still reading through a lot of information and trying to figure things out so I may be getting my wires crossed.

Paul

[jeffrey]

I must admit that I haven't a clue what this would entail and exactly how it works. Is there a site you can point me towards to read more about this method. I'm going to use google and the HMLR site to try and find some further information about it myself.
No. It's something that your solicitor can sort-out for you; that's much quicker and less risky than trying to DiY.

[paulwdn]

No. It's something that your solicitor can sort-out for you; that's much quicker and less risky than trying to DiY.

Thank you again. It's another phrase I can take to the Solicitor to discuss.

Paul

[Telometer]

Your father could do the house up, sell it free of tax, and then gift you (some of) the proceeds. No tax anywhere - save of course any IHT exposure if he should die within seven years and leave an estate (including the value of any gifts in the seven years prior to death) in excess of £325,000 + any unused IHT allowances of his spouse.


With what you propose:

1. You pay income tax on rent received.
2. You (and W and sister) pay income tax and national insurance on the trading profits arising from your trade as property developers. Not CGT.

[paulwdn]

No. It's something that your solicitor can sort-out for you; that's much quicker and less risky than trying to DiY.

Jeffrey,

I can't reply to your PM but thanks for the advice. Although I use the internet to get a lot of information I would never try and undertake this matter without qualified assistance. I was just looking to gain a better knowledge of the area before I speak to a solicitor. Basically I didn't want to go and speak to somebody who only gave me one option and I would be in a position where I had nothing I could throw back at them to discuss alternatives. I'm also looking into the law behind my Dad gifting the house to us because in effect that is what he is trying to do. We just don't know the most cost-effective way of going about it in the circumstances we have

Paul

[paulwdn]

Your father could do the house up, sell it free of tax, and then gift you (some of) the proceeds. No tax anywhere - save of course any IHT exposure if he should die within seven years and leave an estate (including the value of any gifts in the seven years prior to death) in excess of £325,000 + any unused IHT allowances of his spouse.


With what you propose:

1. You pay income tax on rent received.
2. You (and W and sister) pay income tax and national insurance on the trading profits arising from your trade as property developers. Not CGT.

We've been arguing this point with him for a while now but for some strange reason he won't go for it. He wants the 'family' house to go into mine and my Sisters name because he thinks we will want to keep it once transferred. He accepts that we may sell it (which is our plan at the moment) but is hopeful we will change our minds.

Paul

[Telometer]

Well, I suggest that you save the legal fees to begin with, and lend your father the required money to do the place up and then choose what to do with it. (An estate agent might well tell you that selling it as a doer-upper will make more sense than spending the money on it.)

[jeffrey]

Is his concern anything to do with the possibility of future Nursing Home fees?

[paulwdn]

Is his concern anything to do with the possibility of future Nursing Home fees?

Not at all. He is a good few years away from that (I'm only 30). I know it all sounds like we're trying to fiddle something but it is just as I have written. The house is too big for my Dad and he want's to move out but wants to try and keep it (the house) in the family. He knows we don't want to keep it but he is just hopeful (and using a bit of guilt) we will change our minds.

He doesn't want to make any profit on it and if it was possible he would just sign it straight over to us with no fee or cost as a gift. If only it were this simple.

If we do come to sell it we may well do so without any renovation. With renovation and renting it back to my Dad aside all we want to do initially is figure out the best (and cheapest) was to get the house in our names whilst taking into consideration the tax loss of any future sale.

Paul

[mind the gap]

any of this fandangle

Er...fandango? (It's a complicated dance).

[Phlash]

This is a subject even accountants get confused about, including tax accountants.

Trawling the internet hoping to stumble upon the right answer is not the best strategy.

You need to ring up a reputable firm of chartered tax accountants and go and pay for their advice. You at least have an avenue of recourse if your plan backfires - which your particular path is riddled with.

I could list some of the things that you may come up against when trying to do this kind of transaction, but it all honesty I would only express it to a fee paying client for this advice. Some people have studied for many years in order to be able to help people in your exact situation - therefore simply go and pay the money, this is not the kind of transaction to dabble with.

You should be able to negotiate a free 1 hour consultation to check they can deal with your enquiry.

Your current thinking will cost you £££'s, but at least the Country's deficit would be reduced.