My mother is 81 and lives alone in a three bedroom detached in North Yorkshire, no mortgage. She wants me to buy it from her at a reduced price so she can move into a smaller place nearby and have some cash to live on. We have loosely discussed a price of around £200,000 when it is probably worth closer to £280,000. The idea is the difference would be treated as gifted equity.
I have been reading up on this and I think I understand the basics but there are a few things I am not sure about. Stamp duty, I believe HMRC treats the transaction as if the full market value has been paid, so I would pay stamp duty on £280,000 not £200,000. Is that right? I already own a flat in Leeds which I let out so I assume I would also be hit with the additional dwelling supplement unless I sell the flat first.
On the gifted equity side, the £80,000 difference, my understanding is this is a potentially exempt transfer for inheritance tax purposes. If she survives seven years it drops out of her estate entirely. But what happens if she needs care in that period? Could the local authority treat the sale as deprivation of assets even though she received £200,000 for the property?
Finally on the mortgage. Would a lender treat the gifted equity the same as a deposit? So if I am borrowing £200,000 against a property worth £280,000 that is roughly a 71% LTV which should get me a decent rate. Or do lenders view these transactions differently?
Is there anything else I should be thinking about here? I want to get this right before we go to solicitors.
On SDLT, the position for connected persons is that the chargeable consideration is the higher of the actual consideration paid and the market value. Since you would be paying £200,000 for a property worth £280,000, SDLT is calculated on £280,000. That is correct. The higher rates for additional dwellings would also apply if you still own the Leeds flat at completion.
The gifted equity of £80,000 is a potentially exempt transfer for IHT, subject to the seven year rule. On the deprivation of assets question, this is a genuine risk. If your mother requires local authority funded care within the seven year period, the council could in principle argue that she sold at an undervalue to reduce her assessable assets. The fact that she received £200,000 does not necessarily prevent that argument. Professional advice on this point specifically is worth getting before proceeding.
Thanks @CGT_Watcher, that is clear on the SDLT side and honestly a bit of a blow. I had assumed paying £200k would mean SDLT on £200k but I can see the logic of the connected persons rule even if it stings.
One thing I want to get straight on the IHT side. If the market value is say £350k and I buy at £200k, my understanding is the £150k difference is treated as a gift for inheritance tax purposes. Does that mean it is a potentially exempt transfer and my mother needs to survive seven years for it to drop out of her estate completely? She is 81 and in reasonable health but seven years is seven years. Is there any taper relief if she survives say four or five years but not the full seven?
Not to pour cold water on this but have you considered whether the below market value route is actually saving you anything once you factor in SDLT on the full market value, legal costs for a non standard transaction, and the IHT risk if your mother does not survive the seven years. I have seen a few of these family arrangements over the years and the amount of grief they generate with HMRC and solicitors often wipes out whatever discount you thought you were getting.
Might be simpler for your mother to sell on the open market at full price, move into her smaller place, and then gift you whatever she wants to from the proceeds over time. She gets the full sale price, you get a clean gift with a clear PET start date, and nobody has to argue with the valuation office about connected persons. Just a thought.
@PracticalPenny62, I take your point but I think the maths still works even with SDLT on the full market value. The saving is not on the tax side, it is that my mother gets the cash she needs to buy somewhere smaller without having to sell on the open market, wait for a chain, pay agent fees, etc. She is 81 and the idea of viewings and negotiations fills her with dread. So the “saving” is really about simplicity and speed for her, not about me dodging tax.
What I am now trying to work out is whether there is any advantage in her gifting me the equity difference outright versus just selling at the lower price. CGT_Watcher confirmed that SDLT treats connected persons the same either way, but I am wondering if there is a difference for inheritance tax purposes. If she gifts equity now and survives seven years it falls outside the estate, but if she just sells cheap, is the “discount” treated as a gift for IHT anyway? Or does HMRC not care because she received consideration?
Is there anyone here who has actually done one of these family transactions and can say what their solicitor advised on structuring it?
One point not yet covered in this thread is the inheritance tax position on the gifted equity. If your mother sells at £200k when the market value is £350k, the £150k difference is a potentially exempt transfer for IHT purposes. She would need to survive seven years from the date of the gift for it to fall outside her estate entirely. If her estate is likely to exceed the nil rate band, that timing matters. Worth discussing with the solicitor handling the transfer so the PET is properly documented.
The IHT point @CGT_Watcher raised is the one that would worry me most here. If your mother does not survive seven years, the gifted equity is in the estate and you could end up paying tax on money you never actually received. Has she taken independent legal advice on this, separate from yours. I only ask because in family transactions people tend to rely on one solicitor for convenience and that is exactly when things get missed.
One correction on taper relief which is often misunderstood. Taper relief does not reduce the value of the gift. It reduces the rate of IHT charged on the gift, and only applies where the cumulative value of chargeable transfers in the seven years before death exceeds the nil rate band. If the gifted equity of £150k falls within your mother’s available nil rate band, taper relief is irrelevant because the tax charge is nil regardless. The question for @FreyrMagnusson is whether his mother has made other lifetime gifts or transfers that would use up her nil rate band. Professional advice is essential here given the amounts involved.
@CGT_Watcher, thanks for the correction on taper relief, I had that wrong. If we go ahead and my mother sells to me at the reduced price, she would then be moving into a smaller property she buys with the proceeds. Would the residence nil rate band still apply to her estate on death given she would have disposed of this property during her lifetime but replaced it with another one she lives in? I have seen conflicting things online about whether the RNRB follows the person or the specific property. Also, if the gifted equity is a potentially exempt transfer and she survives five years but not seven, the taper relief reduces the IHT rate on that gift but is there any interaction with the nil rate band or does the PET sit entirely outside that calculation?
If your mother is selling her main residence to you, principal private residence relief should exempt her from CGT on the disposal in full, provided she has lived in the property as her only or main home throughout ownership. The risk arises if she moves out before the sale completes. She would then have a final period exemption of nine months from the date she ceases to occupy, but if the transaction drags beyond that window, a partial CGT charge could crystallise. Worth ensuring the conveyancing timetable is tight. Professional advice on the sequencing would be sensible here.