Can I buy my parents’ house under market value?
26 August 2021
If you buy your parents' house from them for less than the market value, there could 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 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 a number of important risks for you and your parents 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 for outstanding debts to be paid 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 there are restrictions on how they can be used, such as retirement homes. Your conveyancing solicitor will advise you of any restrictions like this when they check the property title.
When buying property from family members, you should be aware of the tax implications for both of you. 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.
Could my parents gift their house to me?
If your parents own their home without a mortgage, they do 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 they do pay you rent, 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 you and 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 (or whoever's entitled to it under inheritance laws) and they will have to move out. If you do go ahead with buying the house, you should consider making or updating your will to reduce the risk of your parents' home ending up in the wrong hands.
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 want to go ahead and purchase your parents' home, 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's also a good idea to get a building survey done on the property, to flag up any potential issues.
You and your parents should 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 everyone involved. It's worth having a conversation at the outset to agree what should happen in this sitation, along with any others 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 make sure your lender is happy with the situation, as some will not lend if the buyer and seller are related.