Q&A: Can I buy mum’s house under market value?
Q: Since my father passed away two years ago, my mum has been considering downsizing to a smaller property that is more manageable for her in older age. She currently lives in a four bedroom property with a large garden in an area that my family and I are unable to afford to live in. My mum then made a very generous offer and said my wife and I could purchase her property at a significantly discounted rate, so that we could live there with our two children, but still allow her to downsize. It seems like a win-win situation, but, is there any reason why I wouldn’t be able to purchase mum’s property under market value?
A: The short answer is, yes. You can buy your mum’s house at a discount, however, as with anything, there are a number of risks and considerations to make first.
First, due to the fact that you are buying the property at under market value, you are essentially receiving the rest of the property as a gift. Say the property is worth £400,000 and you buy it for £300,000, then you will have been gifted £100,000. This would result in tax implications on your mum that should be considered before going ahead.
For inheritance tax (IHT) purposes an individual is entitled to a £3,000 annual exemption each tax year. A gift up to that amount to be free from IHT. That is not to say you cannot gift more than this, but gifts above that amount would be subject to IHT implications if the person, i.e. your mum, were to pass away within 7 years of making that gift.
However, significant gifts exceeding the nil rate band (currently £325,000) may be subject to IHT implications depending on the number of years between the gift and the death. If it is less than three the gift would attract a 40% charge, 3-4 years is 32%, 4-5 years is 24%, 5-6 years is 16% and 6-7 is 8%. After 7 years that tax liability reduces to zero.
You don’t mention how old mum is, but it is always best to start the clock running as quickly as possible - but do it with the knowledge that you could be faced with a tax bill if she were to pass away within the next 7 years and how you would plan for that.
There are a number of other considerations, such as Capital Gains Tax, but also what might happen should a dispute happen in the future. You don’t mention if you have any siblings, but is there a chance they may ask for a share in the house’s capital? Or more from your mum’s estate should she pass away?
Also, have you thought about how your mother may pay for any future care if she were unable to live in her own home? Many people choose to use the proceeds of their property to do this and state funding may depend on whether or not an independent board thought your mother was deliberately gifting or transferring assets to a third party, usually a relative, to avoid or reduce their liability to pay for care.
If someone has assets below £23,250, which is the current threshold, then the LA has a duty to assist a person with their social care costs, including care home fees. As such, if the LA decides that a person has intentionally ‘deprived’ themselves of assets, then they shall treat that person as still owning the value of that asset.
As you can see it is far from straightforward and it is essential that you consult an independent solicitor for advice that is unique to your circumstances.
Contact Downs Solicitors to see how we can help.