Sale of Part of Home to Family Member

Sale of Part of Home to Family Member

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I have been asked by a family member to let them know the potential tax consequences of the following scenario. I do not do a great deal of CGT work, so I would be grateful if anyone could point out any howlers with the assumptions that I have made?

Ok… Scenario - Father bought a house as an investment, for cash, a few years ago. Son moved in and pays a below market rent. Father wants to help son get a foot on the housing ladder and will allow the son to buy 20% of the house at market rate. Also, future monthly payments (formerly rent) will also go towards buying more of the house, the price used being the same as when the 20% was bought (i.e. other than the initial 20%, future purchases will not be at market value, they will be fixed). These monthly amounts will only be officially recorded (Land Registry/HMRC etc.) once they amount to 5% of the house price at the initial valuation.

Tax implications:

1. 20% payment - Father will be liable for CGT on 20% of the gain since he bought it (less costs, allowance etc.) Son will be liable for SDLT if it is above the limit.

2. 5% payments - Father will be liable for CGT on 5% of the gain (based on new market value) since he bought it (less costs, allowance etc.) Son will be liable for SDLT on the lower price (if any is due). The difference between the sale price and the market value is considered a gift and will only be of significance should the father die within 7 years and need to pay IHT.

Finally, would the payments on account thing stand up to scrutiny (as in HMRC used to see rent and now nothing for a while) or would it be better for the Father to officially record the 5% first (as in Land Registry, CGT, SDLT etc.) and the son make the instalments in arrears of the part sale being recognised?

Thanks for any help!

Replies (7)

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By pawncob
21st Oct 2015 12:06

Who is going to calculate this (and how) over the next 25 years. It's going to get horrendously complicated, especially with the L.R.

Why not just sell him the house and grant a mortgage?

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By catlady
21st Oct 2015 12:22

Hi Pawncob,

By LR do you mean Lettings Relief? The father has never lived there, it was bought as an investment from day one. Only the son has ever lived there and he will continue to live there as his main home and it will not be let out to anyone else.

The father does not want to sell the whole house, he wants to keep a least 50%. I was going to suggest, that once the initial payment was made, they then record the 1st 5% sale and the son makes his monthly payments until the debt is cleared. Then the next 5% etc....

Thanks for you help!

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Replying to Cheshire:
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By catlady
21st Oct 2015 12:43

Land registry

Red Leader wrote:

catlady wrote:

Hi Pawncob,

By LR do you mean Lettings Relief? The father has never lived there, it was bought as an investment from day one. Only the son has ever lived there and he will continue to live there as his main home and it will not be let out to anyone else.

I'm pretty sure he means Land Registry. It's in your original post.

Good Catch! I did not think of that one...doh!

I think that he intended to register it periodically, say annually, or even after a fixed percentage but it does indeed sound like a lot of hassle... there must be a better way!

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Replying to jonibarnes:
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By Jeh1
21st Oct 2015 12:50

Isn't it an issue if it is a series of events?

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Replying to tom123:
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By catlady
21st Oct 2015 15:20

Series...

Jeh1 wrote:

Isn't it an issue if it is a series of events?


Hmmm...not sure I understand! The only series thing that I can think of is if you split something to reduce its value e.g. by selling a pair of antique vases separately, but to the same buyer, because they are worth a lot less than a pair. For CGT puposes, the full market value will be used for the calculation, not a value based on the fact that it is owned by two owners.
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By johngroganjga
21st Oct 2015 12:30

Why does he not just sell the whole 50% subject to a private mortgage? Same cash flow for father and son. Slashes legal fees by 90%.

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By catlady
21st Oct 2015 12:44

Thanks John, that is a good idea, but I think that he would lose out CGT wise.

I believe the house was unmodernised when he bought it and now it has been renovated, so there is quite a bit of extra value in it now. I think he hoped that by selling part of the house as the son can afford it, it would also allow him to use his CGT allowances for a period of years rather than a one-off. (Apologies I did not mention that earlier!)

Thank you John!

 

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