It may seem like the perfect solution; relocate your growing family into an established family home while your parents – who no longer want the cost and the upkeep that comes with a larger property – downsize to a more manageable home – win/win, right?
While this could be a dream solution, when buying a house from your parents there are a few potential pitfalls to be aware of to ensure yours and your parents’ finances are protected.
If your parents are in a position to sell their current property to you for below market value, they should be aware of the financial implications this could incur.
Your parents would be required to pay Capital Gains Tax on what the property is worth, not what they charge you. For example, if the property is worth £500,000 but your parents agree to sell it to you for £300,000, the remaining £200,000 would be considered a gift and therefore taxable.
Another possible, albeit hopefully unlikely scenario, is if your parents do sell you their property for less than market value and later become bankrupt, there are instances where the Official Receiver can overturn such transactions.
Of course, for many parents who choose to sell their property to their child for below market value, the transaction isn’t about money. With rising property prices, many parents are keen to help their children on, or up, the property ladder if at all possible. What’s more, for a beloved family home, it can be comforting for parents who are growing older to know that the property will continue to be loved and cherished within the family.
Buying a property always comes with additional costs and buying from parents is no exception. If the purchase requires a mortgage, the usual fees will be incurred, and you should also undertake a survey and other searches to ensure the property is sound.
When buying from parents there could be other costs to be aware of and taking legal advice from the outset is recommended to ensure you, or your parents, are not hit with a hefty tax bill at a later date. Unexpected costs could include Inheritance Tax, Capital Gains Tax and Stamp Duty.
By selling a property from parent to child it is possible to make some cost savings. For example, an estate agent is not necessary and therefore these fees can be saved.
There are of course other ways parents can help their offspring onto the property ladder. These include gifting or lending the deposit required, going in on a joint mortgage together (providing parents are working), offsetting their savings as part of their child’s mortgage or by becoming a guarantor on the mortgage.
Whatever option a parent chooses when it comes to helping their child buy a property, the decision could incur tax and have other financial implications and it is important to have all the facts before proceeding.
When buying a property, whether from parents or via the usual property chain, it is essential to get legal advice. It is also vital that parents get advice around their own financial circumstances.
From straightforward sales to complex chains, our team of experienced property solicitors have the expertise you need to ensure your next property purchase goes through smoothly.
For expert legal advice on all property matters, including the pros and cons of buying a property from parents, call the Smith Partnership Move team on 0330 123 1229.