Buying your parents’ house for under market value seems like a win-win situation
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.
However, buying your parents’ home for under market value does come with potential pitfalls. 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.
Capital Gains Tax
If your parents are selling a secondary property – meaning it is not their main residence – they will incur a Capital Gains Tax liability. The amount of tax payable is calculated according to the market value of the property, not the purchase price.
Stamp Duty Land Tax
Stamp Duty Land Tax will be payable by you, unless this is your only property and you are buying it for less than £125,000. This amount payable depends on the purchase price. A Stamp Duty Land Tax surcharge will be applied if you already own a residential property.
The difference between the property’s purchase price and the market value will be regarded by HMRC as a lifetime gift. If your parents die within seven years of making this gift, or they continue to live in the property, it will incur an Inheritance Tax (IHT) liability.
If your parents remain in the property, and they pay you rent, you will have to pay Income Tax on your earnings. However, this arrangement may reduce their Inheritance Tax liability.
If your parents are made bankrupt in the future, the person appointed to deal with their debts (called the Official Receiver) can overturn previous under market transactions. This means the property could be taken off you and used to pay their creditors.
Deliberate deprivation of assets
If your parents later apply for care home funding, they could be accused of deliberate deprivation of assets. The Local Authority could theoretically transfer the property back into their names, making them liable for their own care home fees.
You pre-decease your parents
While it is hard to consider, it is possible that you will die before your parents. This could create problems if your parents are still living in the property, as it will form part of your estate and will pass to your beneficiaries. Unless you amend your Will accordingly, there is no guarantee that your beneficiaries will allow your parents to remain in situ.
Divorce and separation
You also need to be mindful that if you are married, property held in your name is considered a matrimonial asset. If you later separate or divorce, your parents’ property could be divided between you and your ex-spouse.
There is a risk that you and your parents will fall out in the years to come. If your parents intend to remain in the property, this puts them in a very vulnerable position. After all, you are the legal owner and will be entitled to evict them.
Get expert legal advice
If you are planning on buying your parents’ house for under market value, we strongly recommend that you and your parents seek independent legal advice first. You both need to be aware of the tax implications, and other potential problems that could arise.
There are ways to protect your position and minimise the risks. A solicitor can advise on the options available to you, helping you and your parents achieve a mutually agreeable solution. For more information, contact us at Garner & Hancock Solicitors for a free consultation.