It is open to children aged 18 or over to buy their parents’ home for less than it is worth, however this can have serious financial implications.
Selling a home to children is often desirable, helping the next generation onto the property ladder, passing on the home without incurring estate agency fees and keeping a beloved property in the family. But if the sale is for a sum below market value it is essential to take legal advice before completing the transaction, as there could be several issues which could later impact both parents and children.
Tax implications of making a gift
The difference between the amount paid for the property and the amount that it is worth is classed as a gift. For example, if a property worth £400,000 is sold for £100,000, then a gift of £300,000 has been made.
If the parents die within seven years of making the gift, then Inheritance Tax will be payable on the amount of the gift, if the estate is over the Inheritance Tax threshold, on the usual sliding scale.
If the parents are made bankrupt following a sale at an undervalue, then the Official Receiver could overturn the transaction. If the parents need government funding for care home fees within the years following the sale, the local authority may class the transaction as a deliberate deprivation of assets and withhold funding accordingly or even transfer the property back into the parents’ names.
Stamp Duty
Stamp Duty will be due on the purchase and, if the property will be a second home or a buy-to-let investment, the higher rate will be payable.
Implications for parents in parting with property
Once the property has been sold, the parents will not have any further claim upon it. This means that they cannot benefit from any income, nor will they have the right to live there.
While this may not seem problematic at first, if difficulties arise in the future, the parents may find themselves without a home or income on which they were relying. For example, if there is a family disagreement, they could be asked to leave the property.
Alternatively, if a child goes through a divorce, any property they own will be included in the divorce settlement. Similarly, if a child should predecease the parents, the property will form part of their estate and may end up being sold.
Legal representation
It is essential that both parents and children have separate legal representation so that not only do they understand the implications of the transaction, but if difficulties arise later on it can be shown that all parties were properly represented and advised.
If you would like to speak to one of our expert property solicitors, ring us on 0333 305 5189 or email us at info@lpropertylawyers.co.uk
