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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15977
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Background My in-law are retired, have been public sector

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My in-law are retired, have been public sector tenants for 37 years and are entitled to a discount under the Right-to-Buy scheme. My wife and I are considering buying their house for them (they would be sole owners). We’re aware of the rules governing Right-to-Buy and the implications of my in-laws requiring council funded care provision; this is a risk that we are willing to take.

My wife and I could fund the purchase of the property entirely through cash or, preferably, through a cash deposit and mortgage (potentially jointly with in-laws). Before we move forward we need to understand the legal and tax implications of the financing options available to us:
• Cash: paid for by my wife and I.
• Private Mortgage/Loan from us to the in-laws.
• Joint mortgage with the in-laws : we will pay the deposit and all repayments.

We need to know whether the following scenarios are legal transactions and whether they raise tax issues/implications for us or my in-laws:
• My wife and I pay for the house entirely with cash.
• We enter into a private mortgage/loan with my in-laws (variation on the cash option), where we frame the agreement in such a way as to not require the repayment of the funds until such time as the property is bequeathed to us (albeit the risk remains that the property could be used to pay for care services).
• My wife and I pay 60% of the discounted value of the property and get a joint mortgage with in-laws for remaining 40%, but in-laws will not actually contribute to either the deposit or repayments.

If you and your wife pay cash for the house and it is owned by your in-laws, you will each have made a gift to them for Inheritance Tax purposes. So long as each of you and your wife live for at least seven years after making the gift, the value of your respective shares of the gift will not form part of your respective estates for IHT purposes. The gift of the cash for the house would be legal. Cash gifts are made by people every day to friends or relatives for various reasons including property purchase.

You could legally lend the money to your in-laws to buy the house whereby no repayments of capital or interest would be required to be paid to you with the house passing to you on their demise. You would have no income tax to pay as you would have received no interest and there would be no IHT implications for you and your wife as you would have lent the money as opposed to gifting it.

Clearly, if you have a legal charge over the house, then the loan will reduce your in-laws estates for IHT purposes. I doubt the council would have any problem with this method of financing the purchase. I've had several clients who have bought homes for their parents in the past including under the right to buy to scheme but they were outright gifts. You would need to have the legal charge properly drawn up as proof that the cash provision for the house purchase was a loan and not a gift so as to avoid potential IHT problems when your in-laws have both passed away.

A joint mortgage for 40% of the purchase price would be legal but the lender will hold all parties legally responsible for repayments of capital and interest regardless of any private arrangement you may have with your in-laws. The 60% would be a cash gift from you and your wife to your in-laws with the same IHT implications as described in the first purchase method above.

Depending on the price being paid for the property, there may be stamp duty to pay.

I hope this helps but let me know if you have any further questions.
Customer: replied 3 years ago.

Many thanks for your prompt and fulsome response.


One minor follow-up if I may: Under the joint mortgage option, could we treat the deposit paid as a loan between us and my in-laws (repayable on bequeathment) thereby avoiding potential IHT problems?


Many thanks

You could treat the entire cost of the property as a loan if you wish but you would need to have a solictor draw up an agreement to make the nature of the transaction watertight as I said in my previous post.
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