If you find yourself in the surprisingly common situation where your parents are thinking about their selling their property (using a ‘We Buy Any House’ company or estate agent / auction), you may be considering purchasing it from them instead.
Many people in your position would often buy the property in which they reside and let them live in it rent-free. Or, if that’s not feasible, perhaps rent it below the market value.
But is this possible? If so, are there any legal implications or potential practical pitfalls you’ll need to consider?
In this article, we explore these issues to help you decide on the best course of action…
Allowing Family to Live Rent Free
It is absolutely possible to transfer a property to a family member and let them live in it rent-free.
However, if the theoretical rental value of the property – also known as the “fair market value” – sits above the annual gift allowance stipulated by HMRC, the excess amount will be added to the value of your parents’ estate and will therefore be subject to Inheritance Tax (IHT).
This means that in the event of the death of the family member who is living in the property rent-free, their “share” of its value (i.e. the free rent in excess of the allowance) will be included in calculations for the amount of IHT that needs to be paid.
It is worth noting that if you are providing a home for both your parents together, they can combine their gift allowances.
Capital Gains Tax Implications
If a property is let rent free to one or more of your family members, you’ll need to think about what this means in terms of tax.
We’ve already mentioned inheritance tax above, but there is also the matter of Capital Gains Tax (CGT). If you already own a property and decide to purchase your parents’ home too, it will count as a second home – even if you have bought it for them to live in.
This means, if you decide to sell it later down the line, you may need to pay CGT if its value has increased beyond a certain threshold.
You can check for the current threshold by a simple Google search.
Stamp Duty Land Tax
If you already own a home, you will be required to pay an extra percentage of Stamp Duty Land Tax on the additional property you will be purchasing, as additional homes are subject to higher rates.
It is worth considering that you may not need to pay Stamp Duty on a property transfer between family members if they already own the property.
This means that if your parent or parents transfer a property to you as a “gift”, and you do not give them anything of monetary value in return (known as a “chargeable consideration”), you may not be taxed in this way.
However, this action may have Inheritance Tax implications.
You won’t be able to get a standard residential mortgage for a property you won’t be living in at any time. However, certain lenders offer regulated or consumer buy-to-let mortgages that you may be able to utilise instead.
There are fairly strict regulations for mortgages of this kind – they can’t be interest only, and you may need to earn a minimum annual wage. The required deposit may be fairly high and you usually have to own your own home. Certain lenders may have additional rules on top of these.
Letting family live in a “second home” rent-free is a way of providing support and security to loved ones, but it can come with complications. For example, as the owner of the property, there is a responsibility for its upkeep and maintenance.
What’s more, if your parent or parents are not paying any rent – or, at least, paying far less than the fair market rate – you will not be allowed to claim landlord expenses to the degree that you might if they were paying the full amount.
Much will depend on the long-term relationship with your parents. You will know them better than anyone.
You’ll only be able to claim expenses to up the total amount you have received in rent from the property – which may be nothing at all.
Finally, if you own and/or manage the property that your parents live in, there is always the risk of friction and fall-outs.
For example, you may fall on difficult times. The property your parents live in could be the only asset you could use to bail yourself out – but they may not wish to move or be able to afford a new place to rent.
You may also find yourself in charge of the management and upkeep of the property to a greater extent.
In some cases, parents treat or decorate the property in a way that reduces its value. This could lead to potentially devaluing the property.
However, in most cases, it’s best to let your parents live their life in the house as they wish. After all, you’ll have an appreciating long term asset that you can do what you want with down the line.
Draw Up an Agreement
To avoid headaches, arguments and other issues, it’s a very good idea to draw up a clear agreement. We would recommend using a solicitor who will ensure everything is done correctly.
This last place you want to be is in the horrible position of having a major liability on your hands.
By following the above guidelines, you should be able to avoid a number of legal and practical pitfalls involved. Your parents can remain in the property for however long they wish with much better security than through a landlord.
For further information about buying, selling or managing property, get in touch with the team at Property Solvers today.