Buying Your Parents’ House for Under Market Value
Your parents can help you get onto (or move up) the property ladder, and you can purchase a property that might otherwise be out of your price range. Buying your parent’s house for under market value may seem like a win-win situation.
Both you and your parents need to be aware of these before you make any decisions, or you could face difficulties in the future. Some of these potential pitfalls are outlined below. For legal advice tailored to your situation, please contact us at Garner & Hancock Solicitors.
Inheritance Tax (IHT)
If your parents sell their property to you for less than its market value, HMRC will treat the difference between the sale price and the market value as a lifetime gift.
The 7-Year Rule
If your parents pass away within seven years of making this gift, it could be subject to Inheritance Tax (IHT). The liability depends on the size of their estate and the timing of their death. The gift will also count toward their £325,000 nil-rate band, potentially reducing the tax-free amount available for other parts of their estate.
Gifting with Reservation of Benefit
If your parents continue to live in the property after selling it to you without paying market rent, HMRC may classify this as a gift with reservation of benefit (GROB). This means the property will remain part of their estate for IHT purposes, even if they live for more than seven years after the sale. However, if your parents pay market rent for living in the property and do not benefit from it in any other way, the GROB rules may not apply. Keep in mind that you, as the owner, would then need to declare the rental income and pay Income Tax on it.
Bankruptcy
If your parents are made bankrupt in the future, any under-market-value sale could be scrutinised by the Official Receiver or a trustee in bankruptcy. They have the authority to overturn previous transactions that they consider to have unfairly deprived creditors.
This means the property could theoretically be reclaimed from you and used to pay off your parents’ debts, even if the transaction occurred years earlier.
Deprivation of Assets
If your parents later apply for care home funding, selling their property to you for less than market value could be seen as a deliberate deprivation of assets.
Local authorities are entitled to investigate such transactions and, if they find evidence of deliberate deprivation, they could:
- Reverse the transaction, effectively reclaiming the property to cover care costs.
- Treat the market value of the property as part of your parent’s assets, even if the property is now in your name.
If you Pre-Decease Your Parents
Although difficult to consider, there is a possibility that you might pass away before your parents. If this happens, the property would form part of your estate and pass to your beneficiaries under your Will (or under intestacy laws if you don’t have one).
If your parents are still living in the property, this could create legal and financial complications, particularly if your beneficiaries do not agree to let them remain in the home. To prevent this, you should review and amend your Will accordingly, ensuring that provisions are made to protect your parents’ living arrangements.
Divorce and Separation
If you are married or in a civil partnership, the property may be treated as a matrimonial asset in the event of a divorce or separation. This means your spouse or partner could claim a share of its value during a financial settlement, potentially jeopardising your parents’ home.
To mitigate this risk, you should consider legal safeguards, such as a Declaration of Trust, and discuss prenuptial or postnuptial agreements with your solicitor.
Family Disputes
Relationships within families can change, and disagreements may arise in the future. If your parents intend to continue living in the property after selling it to you, they are placing themselves in a vulnerable position, as you will legally own the home.
Without proper legal protections in place, you could evict your parents or sell the property, regardless of any informal family agreements. To prevent such situations, consider creating a life interest agreement or similar arrangement to formalise their right to remain in the property.
Upcoming Changes for 2025
From April 2025, HMRC plans to introduce stricter rules regarding property transactions between family members or connected parties.
Inheritance Tax
Any lifetime gifts involving a continued benefit (such as parents staying in the home) will face closer scrutiny under updated GROB rules.
Stamp Duty Land Tax (SDLT): SDLT calculations may be based on the market value of the property rather than the sale price for connected party transactions, further increasing the tax liability on such arrangements.
It is essential to review how these changes might impact your plans if you are considering purchasing your parents’ property in or after 2025.
Get Expert Legal Advice
Buying your parents’ house for under-market value is a complex process that involves tax, legal, and financial considerations. However, with proper planning and legal advice, you can navigate these challenges while protecting everyone’s interests.
At Garner & Hancock Solicitors, we can help you and your parents
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