Can I buy my parents house under market value?

You can buy your parents' house below market value for any value you like. HMRC acknowledges this as common practice in their Capital Gains Tax manual: "It is common for dwelling-houses to be transferred between members of a family without any cash consideration being paid."

Your dad and mum can transfer the property to you for a pound, for half the market value or even give it all for free. The difference between the market value and what you transfer the property is a gift from your parents to you and it is the gift element that creates the following risks:

• Tax implications. Depending on how you structure the transfer, you could be liable for stamp duty (SDLT), inheritance tax (IHT), and/or capital gains tax (CBT). Go read - The Tax Implications.
• Reversing the transaction. The transaction could be reversed due to bankruptcy or included within a care home fee financial assessment.
• Where will your parents live? Living with your parents can be trying in relationships.
• What about your siblings? Divides can be caused when a child benefits more than another.
• Refinancing. Mortgage lenders require 12 months between an under-market value transfer before lending on the property.

We explain in detail all of the above risks, the process of transferring property to a family member, the costs, how quickly it can be done, and whether your parents have to move out.

How much under-market value can you buy your parents' house?

You can buy your parents' house for any amount of money as long as you both agree to it. Here are a few scenarios:

Scenario 1 - Sell my house for a pound to my son

There is no difference in selling a £500,000 property to your son for £1 or nil because you are still potentially liable for inheritance and capital gains taxes. However, you'll pay no stamp duty. We cover taxes in more detail below.

Scenario 2 - Sell my house for under market value to my daughter

If a property is worth £500,000 and you sell it for £250,000, stamp duty may be applicable along with IHT and CGT. This scenario is common for parents wanting to retain some money for their retirement, and their child funds the purchase via a concessionary mortgage. These mortgages are different because they are for property where the amount being paid, isn't the full value of the property. Read more - How to get a concessionary mortgage

What is the process for transferring the house undervalue?

There are two ways to transfer your parent's house for less than it is worth:

• 1

  Transfer of Equity

Where no money is changing hands, IE, you're paying mum and dad nothing, you can handle the transfer via the simpler transfer of equity process:

• Mum and Dad obtain independent legal advice.
• A solicitor drafts the transfer docuemnts
• Documents are signed, submitted to the Land Registry, and the transfer complete.

There are nuisances, but this process is far simpler. We have a Transfer of Equity Solicitor to handle this type of transfer. Call or email for a quote on 0333 344 3234 (local call charges apply) / help@samconveyancing.co.uk, or Ask a Free Online Question.

• 2

  Sale & Purchase

Where you are paying your parents some money, you'll need to undertake the full sale and purchase process as your mortgage lender requires this. This will delay the process as your parents complete the Property Information Forms, you obtain a mortgage offer, and your solicitor obtains property searches and checks the legal title.

It will feel odd following such a formal route when the objective is for your parents to give you a property and you give them some money; however, the solicitor must follow the process as if you weren't connected as a family.

Tax consequences of buying your parents' house

When buying your parent's house, whether for no money or under market value, tax implications affect both you and your parents.

Stamp Duty if I buy my parents' house

You pay Stamp Duty on the consideration, IE, the money being paid by you to your parents, regardless of the full market value of the property. This is an unavoidable tax consequence of buying your parents' home under market value. For example, if the property is worth £1,000,000 on the open market, but your parents are selling to you for £250,000, you pay stamp duty based on £250,000.

This may or may not mean you must pay stamp duty because of your current property ownership status and the bindings at the transfer point. Use our Free Online Stamp Duty Calculator to confirm your tax liability.

Capital Gains Tax (CGT)

You pay capital gains tax on any gain earned on selling a property that isn't your main residence. CGT is different from stamp duty as it isn't based on the money changing hands where the seller and buyer are connected by being their parent. The child doesn't pay capital gains tax, but the parents will.

For example, if the property is worth £1,000,000 on the open market, but your parents are selling to you for £250,000, the figure used in the tax computation is £1million. There are ways of reducing your CGT liability, so speak to a tax accountant before completing the transfer. Read more - What is the CGT on an under value transfer?

Inheritance Tax (IHT)

You pay inheritance tax on death if your net assets are above a set band. Gifting assets to your children before death is a way to reduce your asset wealth for the IHT computation. The tax risk is that where you gift your property within 7 years of your death, you must include the value/proportion of the value, within your assets. This is known as the 7 year rule.

For example, if your parents gift a property worth £1,000,000 to you and die two years later, they must account for the full £1million under their assets. Read more - HMRC - 7 year rule on gifts

What are the risks of selling under market value to family?

No money for retirement

Your parents may not have budgeted enough to see them through retirement. This could lead to your parents asking for some of the money back at a time when you may not be able to help them.

Care Home Costs

The transfer to you may have been to reduce the costs payable to a care home so as to benefit from council support. You could, however, be found to be illegally depriving the state, and the transaction made void to pay for your parent's care home fees. Read more - The risk of a transfer to avoid care home fees.

Family disputes

A parent gifting one child their property could cause siblings to dispute the transaction if they aren't given the same value gift in return. Good communication with your siblings will help with this as your parents' intentions may get misconstrued if you don't talk to them.

Do my parents have to move out?

No, your parents can remain living in the property. There are implications you need to consider:

• Do they pay rent? If not, the rent is a gift, and the difference between the market rent and the HMRC gift allowance is added to the asset for IHT for your parents.
• Was the transfer before 6th April 1988 as there are special Captial Gains Tax dispensations.
• Do you have a legal agreement confirming your parents have no interest in the property to avoid the property being included under a financial assessment for care homes?

We can help draft legal documents to help with the above, including a Declaration of No Interest or Tenancy Agreement.

What could stop you from buying your parents' house?

Even if your parents are happy to transfer their property to you, some obstacles can stop a transfer under market value.

• 1

  Charges on title

All charges, such as a mortgage, on the title of a property must be satisfied before a transfer can take place.

• 2

  Restrictions on title

All restrictions, such as a Form LL (anti-fraud) of Form A (tenants in common), on the title of a property must be satisfied before a transfer can take place.

• 3

  Bankruptcy

If your parents are made bankrupt within 5 years of the undervalued sale to you, then the transaction could be reversed if the gifts were to avoid paying creditors. In such cases, the receiver in bankruptcy will place the property sold to pay off your parents' debts. Read more - Gifts were for tax planning not defrauding creditors, says High Court.

Are there any creative ways to buy parents' house?

Most creative ways to buy your parents' house under market value revolve around how you finance the purchase and where your parents will live afterwards. Here are some thoughts to consider:

Lifetime Tenancy

Your mum and dad could sell under market value and continue to live in the property using a Lifetime Tenancy. Read more - What is a Lifetime Tenancy?

Be a lender for mum and dad

You could create a loan agreement between you and your parents so you pay them back over some time.

Buy to Let Mortgage

If you are looking to pay your parents some money and they still live in the house, then you'll need to get a Buy to Let Mortgage.