Can You Buy Your Parents’ House for Under Market Value?
You can buy your parents’ house for under market value. However, there may be some tax implications, as well as some other potential pitfalls. You need to be aware of these before you commit to the transaction.
Can I buy my parents’ house for under market value?
There is nothing stopping you from buying your parents’ house for under market value. Unless there are restrictions placed on the property (for example, it’s a retirement home), your parents can sell their property to whoever they like, at whatever price they like. Selling property to children is a common occurrence and can be beneficial for all parties.
However, buying your parents’ house for under market value does come with some consequences. The exact implications depend on various factors, including:
- The difference between the market value of the property and the sale price
- Whether your parents will continue to live in the property
- Whether it’s your parents’ main residence
- How long your parents live for following the sale
- Whether the sale could be considered the deliberate deprivation of assets
The difference between the market value of the property and the sale price
If you buy your parents’ property for under market value, then they are essentially gifting you a portion of the property. For example, if the true value of the property is £350,000 and you buy it for £250,000, then they have gifted you £100,000.
Gifts above the nil rate band that are made within seven years of death are subject to inheritance tax (IHT). So, if your parents live for seven years after you buy their property for under market value, there will be no inheritance tax on this gift. The exception to this rule is if they continue to live in the property after the sale or make an income from it (see below).
If they die within seven years of the gift, then inheritance tax could be payable.
Will your parents continue to live in the property?
If your parents intend to live in the property after the sale, then inheritance tax will be payable. However, if they pay you rent at the market rate, then this will reduce the IHT liability. The income you earn from this rent will be subject to income tax.
Your parents should also consider that as the legal owner, you could technically evict them. This has been known to happen following a family dispute. Their home could also be at risk if you divorce, are made bankrupt or pre-decease them. In the case of divorce, the property will be considered your asset and so could be included in the divorce settlement. With regard to bankruptcy, an Official Receiver could use the asset to pay off debts.
If you die before your parents, then the property will be inherited by your beneficiaries as set out under the terms of your Will or the intestacy rules. Unless you have made a specific provision to allow your parents to remain in the property in the event of your death, then they could lose their home.
Is it your parents’ main residence?
If the property is not your parents’ main residence, then the sale may result in a capital gains tax liability. The same is true if the property is not your main residence when you come to sell.
How long your parents live following the sale
As mentioned above, if your parents live for seven years following the sale, then IHT will not be payable on the gift – so long as they don’t live in the property or make any income from it. However, if they die before seven years has passed, the portion of the property that was gifted to you could be subject to inheritance tax.
Could the sale be considered the deliberate deprivation of assets?
If your parents go into a care home, the local authority will carry out a means-test to see whether they are eligible for funding. If they have sold their property to you for under market value, they may be accused of the deliberate deprivation of assets. In other words, the local authority will say they are trying to dispose of their assets to avoid paying care home fees. If so, the local authority may treat your parents as though they still owned the property.
What about stamp duty?
Stamp duty land tax may also be payable if you buy your parents’ house, depending on the rules at the time of purchasing. However, stamp duty is avoided if your parents own their home outright (without a mortgage) and gift it to you in its entirety.
Get expert legal advice
Buying your parents’ house for under market value sounds like a great idea, but actually, it does carry certain risks. These very much depend on the circumstances.
That is why we strongly recommend that you get expert legal advice before proceeding with the sale. A solicitor can explain the tax implications and other potential pitfalls that may arise, tailoring their advice to your personal situation. There are various legal devices that can be used to protect each party’s position. A solicitor can outline these in more detail, ensuring both you and your parents benefit from the arrangement.
If you would like to speak to a solicitor about buying your parents’ house for under market value, please call us on 0191 567 7244 and we’ll be happy to help you. If you would rather contact us online, email us at firstname.lastname@example.org and one of our team will be in contact with you shortly.