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Property purchased for a friend who cannot raise the finance

Property purchased for a friend who cannot...

A client of mine is helping a friend purchase a property. Currently the friend cannot obtain a mortgage, but is able to provide the deposiut and make all the repayments. So my client will get the mortgage in her name and then after two years it is hoped that the property can be aquired in the friends name. What are the income tax and capital gains implications?

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03rd Jun 2011 16:31

Hopefully, none

 The position revolves around who has beneficial ownership of the property from the time it is purchased until it is transferred to the person resident.

The way you have described it your client's friend is in reality buying the property but the documentation will, on the face of it, show a different story.  If the whole transaction goes ahead as envisaged I doubt your client will ever have beneficial ownership.  I am assuming she is merely reimbursed for all expenditure relating to the transaction.

This really needs to be documented correctly.  I have no idea how to do this.  Perhaps some legal document establishing a bare trust, or it might be sufficient just to have documents signed by all the parties setting out the position.

 

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03rd Jun 2011 19:57

Guarantee

Could the friend guarantee the clients mortgage (like this: http://www.lloydstsb.com/mortgages/lend_a_hand.asp ) as this would avoid the need for a sale later on ( costing legal fees and SDLT)

In any case you should make sure they have thought through all the 'unthinkables' (e.g. death, divorce, illness, jobloss, one of them suddenly wants to leave the country/has anaffair with the other's husband, etc etc). As the CEO's diary shows, real life and human frailty trump strategy.

 

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03rd Jun 2011 23:39

Independent legal advice

Let's call the friend 'Mr Friend' and the client 'Ms Client'.

I do think Mr Friend and Ms Client should each obtain independent legal advice about the arrangement.  In my view there needs to be a formal legal agreement between them which sets out and, as far as possible, protects the respective interests of each of them.

Also they need to be sure that the commercial lender is fully aware of the circumstances of the arrangement, including the fact that Ms Client is buying the property with the intention that Mr Friend (and not Ms Client) will live in it (it is, in effect, a buy-to-let arrangement).  If the mortgage lender is not told the full facts there may be an allegation of criminal conspiracy to defraud the lender against both Mr Friend and Ms Client.

Is the mortgage to be an interest only or a capital and interest repayment mortgage?  If the latter there may be a net income to Ms Client for tax purposes if Mr Friend settles the monthly mortgage repayments due (presumably) from Ms Client. 

How will the future sale price for the sale by Ms Client to Mr Friend be fixed?  Will it be open market value of the property at the time less capital contributions and deposit already paid by Mr Friend?

It seems to me that a Capital Gains Tax liability could arise for Ms Client on the later sale to Mr Friend.

I would have thought it was worth exploring the possibility of Mr Friend obtaining the mortgage himself (with a supporting guarantee from Ms Client) so that the initial purchase is in the name of Mr Friend (but it would still be necessary for Ms Client to obtain independent legal advice concerning the guarantee).

David

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