Gift With Reservation:house

[FredPuli43]

My daughter, like so many, needs the bank of mum and dad. If I give her the money to buy a house outright and live 7 years, that is tax free. But what if I grant her a mortgage, since she does not earn enough to get one from the standard high street lender? Let's say she buys the house or flat on a 100 per cent mortgage to me at the standard capital plus interest calculation used by banks. On my death, how would HMRC calculate the value to my estate ? Would they ignore it if 7 years had past? Would they simply calculate the amount of capital repaid? Would they treat the whole loan, though not yet paid off, as part of the estate? Or would they treat as a gift with reservation, in that I had retained an interest of sorts in the property; after all, if she defaulted I could repossess it. And what if the mortgage was 'interest only' ?

[VHG]

>>.If I give her the money to buy a house outright and live 7 years, that is tax free.

You can give so much a year to a person and it is tax free after 7 years, but I am not sure you can give a person enough to buy a house and it becomes tax free after 7 years.

>>Let's say she buys the house or flat on a 100 per cent mortgage

I doubt if you will find anyone to give you 100% mortgage at the moment. After the banks got their fingers burned with toxic loans a few years ago they now want 40% of the value of the house before giving a mortgage.

[woofgang]

Why don't you buy the house and have her pay you rent? much simpler.

[atalanta]

Presumably she will inherit at least some part of your estate. By far the simplest thing to do would be to make the mortgage a completely private deal. Let her have the money, let her pay it back at whatever rate you agree, but do not commit this agreement to paper. Whenever you die, if there is any of the loan still outstanding, tell her in advance to abandon the deal and regard the loan as her inheritance. The loan will not appear in your estate, the Inheritance tax (if any) will be reduced, and she will gain her inheritance in the simplest possible way. If you intend to declare to the Revenue any interest she pays you, this scheme will not work. Instead of calling any payments "interest", just regard the loan as lasting slightly longer than it would otherwise. If anyone looks at your bank statements (and why should they ?) these amounts from her are simple repayments, and interest need not be mentioned.

[FredPuli43]

Why should anyone look at my bank statements, atalanta? Well, HMRC will want every entry for the past 7 years from the date of my death, for a start. They'll be looking for evidence of gifts made. I had to employ a specialist accountant when my mother died, since the Revenue claimed that she had made £300,000 in gifts out of capital, monies over and above her income after expenses, in 7 years, a claim based on their analysis of her bank accounts.

If I did take this somewhat unusual course, rather than gift the house outright, it occurs to me that it would be better done by a trading company, of which I or the family have control, assuming that is within the company's powers, though I suspect that the Revenue are alive to this possibility and would look twice at it, though my daughter is not a director (or shareholder, come to that).

[Buenchico]

As I see it, the fact that the loan is a mortgage is irrelevant. You are simply lending someone money.

Let's say that you lent your daughter £100,000 to buy a house. Further let's assume that, at the time of your death, she still owed you £50,000. That amount is owed to your estate, and thus forms part of it for the purposes of calculating IHT. (The '7 year rule' simply doesn't come into it, as you never made a 'gift'. The position would be exactly the same whether you died 1 year after making the loan or 20 years after making it).

Chris

[LoftyLottie]

Chris is correct. Call it a loan which with a close family member, especially an only child is quite acceptable. I have checked this with qualified accountants. My accountant and bank say this is purely a close family arrangment. If you and your daughter trust each other then this is fine. However, you need safeguards in case she marries, or has a legal partner at a later stage when things could get complicated in a matrimonial dispute, etc. You have no obligation to charge interest or act like a building society.

[LoftyLottie]

Woofy, if Fred buys the house and rents it out to his daughter, he becomes a landlord with landlord's obigations and he will pay tax on the income from rental.