Can I buy my parents’ house under market value?
16 January 2020
You can buy your parents' house from them, but if you are buying it below market value there may be tax and other implications both for you and your parents. In this article, we explain what these implications are and the key points to be aware of if you are buying a family member's home for less than the market value.
Gifted property explained
If your parents plan to sell their house to you for under market value, they will essentially gift the rest of the property to you. For example, if your parents' house is worth £200,000 and they sell it to you for £150,000, this means they are gifting you £50,000.
We would always recommend seeking independent legal advice in this situation, as there are further implications to be aware of.
For example, there are significant implications of transferring the property under market value if your parents become bankrupt in the future. When someone becomes bankrupt, the Court appoints an official to arrange payment of outstanding debts to creditors. This official is called the Official Receiver, and they have the power to overturn under-value transactions in certain situations. It's important that you understand the potential implications of this.
In addition, even though your parents may own their home, there may be some homes that cannot be gifted because of restrictions, such as retirement homes. Your Conveyancing Solicitor will advise you of any restrictions when they check the title to the property.
With any property transaction you should be aware of the tax implications for both you and your parents. There may be Inheritance Tax and Capital Gains Tax to take into consideration, together with Stamp Duty Land Tax. You should also bear in mind that if the property is not going to be your main residence you could be liable for increased Stamp Duty Land Tax, as the property will be classed as an investment/second home.
If your parents own their home without a mortgage, they do also have the option to gift it to you in its entirety, even if they still live in it. Doing this instead of selling it to you under market value would avoid any Stamp Duty Land Tax. What's more, if your parents live for a further 7 years after making the gift, and they no longer live in the property or receive an income from it, the property would be exempt from Inheritance Tax when they die.
If they are still going to live in the property, it will still be liable for Inheritance Tax when they die unless they pay you rent at the market rate. If that happens, you'll have to pay Income Tax on that income.
Implications of gifting a property
While there may be some benefits to gifting a property, it also carries a significant amount of risk and it's important that your parents consider this.
Once you parents have sold or transferred the property to you, they will no longer legally own it and have no rights to any income from that property. From your parents' perspective, this is a risky move as you will hold all the cards financially.
This is particularly risky if they intend to continue living in the property. If you and your parents fall out you could evict them from their property because you are the legal owner. On top of that, if you get married and subsequently divorce, the property could be treated as part of your assets and potentially shared with your ex-spouse.
Your parents may also be accused of Deliberate Deprivation of Assets if they gift you their home. Some people have done this to avoid paying for the cost of their care as they grow older. A Local Authority can, by law, transfer the property back into your parents' names if they decide the transfer has happened to avoid care home fees. The value of the property will then be included when deciding whether funding for care is given.
The final concern is if you die before your parents do. If this happens and they are living in the property, the house will pass to whoever you left it to in your Will and they will have to move out. If you proceed with the transfer/purchase of the property you should consider revising your Will if you wish to protect your parents and enable them to continue to live in the property.
So, the risks for your parents are very real. Their Solicitor should fully advise them of the risks and implications of transferring their property to ensure they fully understand their position.
Process of purchasing your parents house under market value
If you wish to proceed with the purchase you will need to instruct an independent Conveyancing Solicitor and your parents should also instruct their own Solicitor to avoid any conflicts of interest.
Even though you may be familiar with the property you should always consider submitting searches to protect your interests. For example, you may not necessarily know of planning permissions in the area which may affect the property in the future. It is also prudent to undertake a survey on the property to protect your interests.
It's also a good idea for you and your parents to sit down together and discuss what will happen as part of the transaction. For example, if a mortgage valuation means that you need to renegotiate the price further down the line, this can be stressful and emotional for all parties. It's worth having a conversation at the outset to agree what should happen in this and other situations that might arise.
If you plan to buy the house outright then the Conveyancing process will continue just like any other purchase. If you intend to purchase with a mortgage though, you should ensure the lender is happy as some will not lend if the buyer and seller are related.