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Shantal-Mod
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Category: Property Law
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Customer Question

Hi. My parents need to move house. Their existing house has a highly uncertain value due to a recently announced nearby construction project. It might be worth £250k but who knows. They will market it for a year and take the best price they can get. Because they need to move now for medical reasons, and because the new house will be about £400k, I need to assist them financially. The end result will probably be that they will own equity in the new house equal to the value of the sale proceeds of the old house, and I will own the remainder. So I will put in £400k now, reducing down to perhaps £150k in future. How do we do this? If I buy the whole of the new house now, then in a year's time do I need to sell them perhaps £250k's worth? If so then I will end up paying Stamp Duty twice on part of the value of the property. Is there a simpler solution? Could I perhaps hold an uncertain part of the value of the new house on trust for them?
Submitted: 3 years ago.
Category: Property Law
Expert:  Alex J. replied 3 years ago.
Hi,

Thank you for your question and welcome to Just Answer.

A much simpler solution would be to simply lend them the money on non commercial terms.

You would receive a legal charge over the property this would initially cover the £400k and then when a payment was made it would stay in place for the balance.

You could then include an interest provision so that your parents pay interest should the pass away or sell the property at a profit?

I look forward to hearing from you.

Kind regards

AJ
Customer: replied 3 years ago.

Understood, but I want to own an equity stake in the property to participate in any growth in its value. I want to end up with £150k (if that is the number) of equity.

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

The answer then is to register yourself as owner for part of the money and then lend them the rest of the money.

So the transaction will take the form or part loan and part equity.

So say for example the property is worth £400k. You agree to buy it with your parents £250k them and £150k except you will be lending them their share. You will then be registered as the legal owner but will also have a legal charge to the extent that your parents borrow the money from you.

When they then sell their house you will be repaid your loan to the extent that the proceeds cover this?

The three of you will be registered as the owners of the property.

Kind regards

AJ
Customer: replied 3 years ago.

Yes, but the problem is.....I don't know how much they will be able to sell their exsiting house for and so I don't know until then how much equity we will respectively own. That is the gist of this question.

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

The alternative would be that you are all registered as the legal owners of the property.

You register yourselves as tenants in common and you have a deed of trust to detail how the property is owned.

When your parents then pay you some money that deed of trust is altered to reflect the new ownership.

Are your parents able to contribute anything to the initial purchase?

Kind regards

AJ
Customer: replied 3 years ago.

No they cannot contrubute anything until they have sold the existing house.


 


I we do a deed of trust how would that work? I would buy it as the legal owner with the DoT saying that I am holding an unquantified amount on trust for them? Surely a DoT needs to specifiy the proportions of ownership?


 


£25 tip for this.

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

You would buy it as legal owner and the Deed of Trust would Specify the Beneficial Interest between the parties. Initially the proportion could be say £10k to £390k. You could lend them that initial £10k under a separate loan. That way at least they would hold some interest

The Deed would contain a provision for altering the beneficial interest when you parents sell their house.

Alternatively all three of you could be legal owners as tenants in common with a separate deed of trust describing the beneficial interest.

Will you inherit your parents share when they pass away one day in the future?

Kind regards

AJ
Customer: replied 3 years ago.


Not quite what I am after. The new house needs to be bought now, for £400k. If my parents sell their old house in 1yrs time for £250k I want them to have 62.5% ownership at that point. How can I set up a deed of trust now where the future ownership %'s are uncertain?


 


 


 

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

If your parents are not registered as the legal owners from day one then it creates the following issues:
1. When they become legal owners you will incur a stamp duty land tax charge;
2. Their ownership wont be binding on your creditors if they are only beneficial owners.

Are you suggesting you want a deed of trust that gives them no beneficial ownership from day one?

Kind regards

AJ

Customer: replied 3 years ago.


Yes. They should have no ownership if any kind until they have sold their first house.

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

You could grant them an option to purchase 62.5% of the Beneficial Interest at £250k if they sell their property within the next year.

They would not be legal owners and therefore this could cause problems if you ever went bankrupt.

Would that work?

Kind regards

AJ
Customer: replied 3 years ago.

No, because the sale price of the first house is uncertain and therefore the percentage is not known up front

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

Then the option can state that your parents will have the right to purchase "Up to" 62.5% of the beneficial interest of the property for £250k. With such purchase sum and equity percentage to be reduced in proportionately.

You could just buy the property and then when they sell the house enter into an agreement on terms that best reflect your parents position.

Why specifically do you need a pre agreement?

Kind regards

AJ
Customer: replied 3 years ago.

I don't need a pre-agreement. And yes I agree the simplest thing would be for me to buy the whole house now for £400k and then sell them whatever proportion they are able to buy the proceeds of the sale of the first house. The problem there is that I will incur stamp duty when I buy 100%, and they will incur stamp duty on whatever proportion they buy from me in a years time. This is why I am asking the question.

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

I am afraid the only way that is possible is to ensure you are both registered as the legal owners from day one.

As I have explained you would have to give them a very small percentage of the beneficial interest with an option to increase it when they sell their house.

If they are not involved in the transaction from day one there is a risk you could incur two SDLT charges.

Kind regards

AJ
Customer: replied 3 years ago.

OK. So on day one I buy 99% of the legal and beneficial interest in the new house. I grant them an option to buy "Up to" 62.5% of the legal and beneficial interest of the property for £250k. When they have sold the old house they exercise that option and pay me £250k.


 


Is there SDLT on the £250k?

Expert:  Alex J. replied 3 years ago.
Hi,

Thank you.

I am going to refer this to our tax experts.

While I can answer this point in isolation I do not believe it would be appropriate. Without seeing all the papers and only speculating on the arrangement I cannot give you a certain answer.

Kind regards

AJ
Expert:  Shantal-Mod replied 3 years ago.

Hello,


It seems the professional has left this conversation. This happens occasionally, and it's usually because the professional thinks that someone else might be a better match for your question. I've been working hard to find a new professional to assist you with your question, but sometimes finding the right professional can take a little longer than expected.


I wonder whether you're OK with continuing to wait for an answer. If you are, please let me know and I will continue my search. If not, feel free to let me know and I will cancel this question for you.


Thank you,

Shantal

Customer: replied 3 years ago.


Pls cancel it

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