Thinking of Buying Your Parents' Home? Or parents, selling to your children?
That can be both a practical and emotional decision. You may want to help your parents or children, move up the property ladder or simply keep a cherished property within the family.
However, what appears to be a straightforward family arrangement can have significant legal, tax and financial implications. How much you pay for the property, whether your parents continue living there and how the transaction is structured can all make a difference.
If this subject is pertinent to you whether parent or 'child', do please read this month's helpful and informative article from Lymington's Scott Bailey Solicitors!
If you’re planning on buying your parents home, there are a few things to consider first
Buying your parents’ house at market value
Buying your parents’ house at its full market value is generally the most straightforward option. Legally, the transaction works in much the same way as buying a property from any other seller and avoids some of the tax complications that can arise when a home is transferred for less than it is worth.
Stamp duty land tax (SDLT) may still be payable, however, with higher rates potentially applying if the property will be a second home or investment.
Buying your parents house below market value
Buying the house below market value may create additional tax and estate planning considerations.
If your parents sell you their home for less than its market value, the difference between the amount you pay and what the property is worth may be treated as a gift for inheritance tax (IHT) purposes.
This is generally treated as a potentially exempt transfer. No immediate IHT charge arises, but the value of the gift may still be taken into account if your parent dies within seven years.
Further complications can arise if your parents continue to live in the property. If they remain there without paying full market rent, the gift with reservation of benefit rules may apply, potentially meaning the property is still treated as part of their estate for IHT purposes.
Capital gains tax may also need to be considered. If the house is your parents’ main residence, principal private residence relief may mean no CGT is due. However, different rules can apply to properties such as holiday homes and buy-to-let investments.
Can you buy your parents’ house to avoid inheritance tax?
Buying a parent’s property does not automatically remove it from their estate for inheritance tax purposes.
If your parents sell the property to you at full market value and no longer retain an interest in it, it will generally no longer form part of their estate. However, if the property is sold below market value or they continue to live there without paying full market rent, the gift with reservation of benefit rules may apply.
Where parents plan to remain in the property after selling it to their children, it is therefore particularly important to understand the tax implications of the arrangement.
Buying half your parents’ house
It is also possible to buy a share of your parents’ home rather than the whole property.
Again, careful consideration is required if your parents will continue living there. The gift with reservation of benefit rules could apply depending on how the arrangement is structured, although different rules can apply where parents and children live together and fairly share household expenses.
There are also practical questions to consider, including how the property will be owned, how costs will be divided and what should happen if someone later wants to sell.
Can buying your parents’ home affect care home fees?
Transferring a property can also have implications for future care costs.
Local authorities may investigate transfers where they believe someone has deliberately reduced their assets to avoid paying care home fees. This is known as deprivation of assets.
Changing the legal ownership of a property therefore does not necessarily mean its value will be disregarded if a local authority later assesses your parents’ ability to contribute towards the cost of their care.
Getting legal advice before buying your parents’ home
Buying your parents’ house can be a sensible option in the right circumstances, but inheritance tax, care fees, stamp duty land tax, capital gains tax and your parents’ continued occupation of the property can all make the position more complicated.
Combining estate planning and property law expertise, Scott Bailey’s solicitors can advise families on the legal implications and help structure the transaction appropriately, whether the property is being purchased at market value, below market value or as part of a wider estate planning arrangement.
Scott Bailey has offices in both Lymington and Lyndhurst, and if you’d like to make an appointment to discuss buying your parents’ home and the options available, you are welcome to contact the team.
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Founded in 1930, Scott Bailey has grown to become a leading firm in the New Forest, providing a full range of legal services to private individuals and businesses. Services for individuals include Residential Conveyancing, Divorce, Family, Wills Trusts & Probate, Litigation & Disputes.
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