AIBU to take all the equity?

[HalfwayCrook]

So DM (working, healthy, in her 60s) has always been terrible with money and has a lot of debt hanging over her. The family home which has been on a 100% LTV interest only mortgage is coming to the end of its term next year and due to her age she will not be able to get a re-mortgage without getting involved in some dreadful equity release scheme or some such.

There is no question of downsizing or selling the property as she will not hear of moving house. The plan I have come up with is for me and DH to buy the family home for the price of the mortgage (i.e. being gifted £175k of equity which has been gained through price rise alone) and to then pay a repayment mortgage allowing DM to live there rent-free. This would mean that the family home is kept, the equity is not lost (particularly to pay off her other debts) and that she would free up significant monthly income by not paying the mortgage to pay off these other debts.

The issue is that I have a sister and I am concerned that she may see this as me taking away any chance of an inheritance? For background, although we have similar salaries she would not have the financial capacity to do this as she has just bought her own house (after living in the family home for 15 years not paying rent, bills or food). When she was looking for properties, I encouraged her several times to buy the family home instead but each time she refused (it is not in the best state of repair however perfectly liveable). As far as she knows, the family house is written off and is to be used to pay off debts etc. Also by DH and I taking this on, it will mean we are unable to upgrade our own home (living in a 1 bed flat) which means that we are taking on a big hit to our personal life e.g. less space to start a family. It has taken considerable stress and research in order to plan this and she would never have put forward this herself.

I feel that if we pay into this for say the next 20 years the proceeds from the resultant sale should be ours? However if by some terrible misfortune DM passed away in the next 5 years I accept that it would be best to share with DSis – perhaps two thirds to one thirds? AIBU?

Buying at market value is not an option.
I am sure DM will be able to get some sort of equity release package but a bad one. If not she will be forced to downsize that is correct although I think it likely she will be able to find somewhere that would take this on for equity release. She is not too interested in the equity part of it and probably would not spend it on account of her debts being paid off anyway soon and having a good pension.

Yes you can get a second residential mortgage in this scenario.

Well it seems odd that people are saying that this is a terrible risky idea but also at the same time saying that DSis should share the equity despite not wanting involvement or liability? How does that make sense?

DM will not become bankrupt.

YABU on all counts. Firstly, before any transfer of property takes place then you need to be absolutely sure that there is the wherewithall to pay off the large debt. Anything else would be dishonest.

Secondly, I would say that if you take all the equity then without doubt you willl damage your relationship with you sister. I can speak from experience, as my not so dear brother has manipulated a situation where he will inherit my parents house and leave out me and my other brothers. This initially was started off by father who has since died. Now my brother has moved his family in with my mother, and will inherit. This is under the guise that he is carer, which is a load of bollocks. I am no longer in contact with either of them, not just because of this, but it was the cherry on the top.

One thing for sure money and inheritances can and do break families.

This is a very bad idea!!!!!

Your mother has options, she just doesn't like them! That is her mess to sort out. She is fit and working and needs to take responsibility for her previous poor financial decisions.
You would be putting a mill stone around your own neck and risking your relationship with your sister.

Kardashianlove so with this plan we would be free to decide either to live in a flat or small house in our current area or buy a family home elsewhere i.e. possibly near DM. If we stayed in our area in a smaller property it would be entirely our decision to do so!

The sentimental value and the hassle of moving is why DM refuses to move that is all. Which is why viewing flats would make no change to those reasons? Also not sure she could get much for 175k. It would not be good for her to move further away, she is already quite isolated plus also needs to get to work. Moving the other way closer to us is not an option as prices are much higher.

I'm not an inheritance tax specialist but all those saying if your mum dies within 7 years you'll be screwed on IHT are understating the risk. If you "give away" your family home and continue living there rent free then HMRC class it as a "retention of benefit" and the full value of the house forms part of your estate whenever you die. It's as if you haven't really given it away at all.

OP - I don't know what the values are here and you keep saying that it's under the IHT band. But whatever amount you pay to her (ie the current mortgage amount) is the max that you will be able to deduct from the house value when she dies (and I don't know if you'd definitely be able to do even that). So if the house is currently worth, say, £375k (£200k mortgage and £175k equity) but when she dies in, say, 10 years it's worth £650k then £450k of the house value will form part of her estate. There's a real risk that at least some of that value would be subject to IHT at 40%.

My main point is that this is an arrangement where you take on all the risk and uncertainty. You seem pretty convinced that no problems will arise in the future (eg if you get divorced your husband will be happy to keep paying the mortgage...) but the fact is problems will arise. That's fine if you've thought about them and consciously provided for them but to just waltz in without really thinking about the longer term financial and social impacts is really naive.

Bpisok yes definitely a risky venture no doubt! However I am glad you can sort of understand how we came to this idea.

Your proposal sounds very good to me. Bear in mind DM has other means of paying off the debts but this will take about 3 years to come into play i.e. she will have lost her 'beloved home' by that point.

So you can't actually afford the full market value? How would she fund her retirement, or is she planning to withdraw the capital to pay off her debts? If she were to need care suddenly she would not be able to fund it from the equity she has accrued but it would still be taken onto account as an asset, likely repayable on her death. If she died suddenly would you sell up then? Does she have any life cover with the mortgage?

Tbh you asked iywbu and yes it comes across that you want all the financial benefit for facilitating this plan, but are couching it as supporting your dm. There are other issues going on in your family dynamics which this simply complicates. At your stage of life it would be unwise to tie yourselves into such an indefinite financial commitment , especially one which may not ultimately amount to the lump sum you. Maybe your sister is more astute than you think.

Any plan would of course be agreed with DSis in advance! However I expect her to take into account the risks and sacrifices we are taking and the money being put in to come up with a fair arrangement all round should the house be sold eventually.

Where on earth do you live - I live in Surrey and you can get nice retirement properties for that amount

You all need to grasp that sentimental value and the hassle of moving are not reasons to stay - she has enough equity to get a nice retirement property (based on Surrey prices). Then the equity she has is protected and she can live well.

CheesyMother so you are saying if DM passes away in over 7 years time IHT will be still be liable if the value of the gifted equity has risen above threshold. If the 175k gifted has indeed risen to over 325k on that half alone then surely that would be an amazing scenario regardless which is highly unlikely? I did not realise there was IHT liability after 7 years?

There is no question of downsizing or selling the property as she will not hear of moving house

THIS is the issue you need to resolve. I understand she is being stubborn about it, but she is living beyond her means. She needs to move to something more appropriate, manageable and affordable, rather than you buying her out to keep here there. Why is she being so precious about it? I do understand it’s not great to move from your family home full of memories. But people do it as life has to be practical.

Concentrate on resolving this rather than pandering to her feelings of entitlement. You can’t just say and believe “that’s not an option” because it is an option. It’s the most sensible and fairest option for you all.

If we stayed in our area in a smaller property it would be entirely our decision to do so!
Of course! I was just saying that once you’ve got kids your feelings on this could change and it’s a really long time to be tied down and not have that option.

The sentimental value and the hassle of moving is why DM refuses to move that is all. Which is why viewing flats would make no change to those reasons?
I just thought that if she sees what she is able to buy she may change her mind, I thought that she would be able to get a really nice flat for less money, obviously I don’t know the area.
I know a couple of people who have not wanted to downsize the family home for sentimental reasons and then actually seeing alternatives in person has made them realise that it’s actually the better decision.
Was only a suggestion as you have said that the best thing for your mum would be to downsize but she refuses.

Lizs yes we can only afford it mortgage value i.e. half market value. Debts will be paid off by other means in the near future. No life cover. I suppose we would be selling it if she died unless we decided to keep it (would probably own outright by then so could rent out) or DSis wanted to move in.

DSis is not astute etc she barely knows what a mortgage is! She just wants to live her own life and not get involved which is fine of course.

I agree DMs reasons to stay are silly but that is the framework we are trying work within. Equity release is far more likely than downsizing if she has that option.

I don't get why you would 'live in the house if necessary' although you don't want to.

How is any of this 'necessary'? It's so not!

Yes @HalfwayCrook there absolutely can be an IHT charge after 7 years if there is a retention of benefit. As there hasn't really been a gift that starts the 7 year clock ticking.

The classic example of a retention of benefit is gifting your main residence and continuing to live in it rent free. The fact that no-one has mentioned this to you means that you either haven't actually spoken to any advisors at all or you've spoken to terrible ones!

God knows how many other similar issues there are - tax is just the one I'm aware of. Plenty of other people have mentioned diminution of assets, so there may be other impacts that you are just not even aware of right now.

You come across as being resentful of your DSis's rent free life. and now want payback.

You say your DM is soft - but she is now plotting to keep her house with a scheme that a) traps you in a 1 bed flat and b) stitches up her other DD with regard to inheritance and c) creates a situation where DD resents the other DD.

Your DH won't want to, or be able to, support your DM if the two of you divorce. How will he fund another home for himself? Especially if you've got DC by that point?

All of this is very, very ill advised.

You clearly want everyone to say yes, but the house and keep all the equity.

It's not your equity, it's not your inheritance. It's your mothers life savings. Equity release might be just the job for her.

Why not let your mum deal with her issue however she likes. It's a huge risk to take buying this property and not paying the market value. And it is wrong to screw your sister over as you know you are trying to do. But many many pps have told you that.

If feelings change we just move area where we can easily get a family home, even right now we could have do that? Our flat can buy a family home in DM's area now if that was necessary. We would never stay in a small place unless we preferred that option compared to moving area.

DM does not care about how nice a flat is, she likes living in the place she has the best memories of. Downsizing is her last resort only if equity release not possible. She would give the entire house away to anyone or any company as long as she could stay there!

It’s all about the money for you.

Gross.

What if Dsis moves back in at some point and then the the two of them are living Rent free whilst you pay the mortgage ! There's the potential for so many difficult scenarios with your plan.
I understand you want to save the equity from disappearing but the personal cost in complexities and family fallout could be huge and there's no guaranteeing you won't lose the equity anyway further down the line, as people have already explained.
I think you need to let go of the idea that you can safeguard the equity and keep your mum in her home. It would be so much simpler long term for her to downsize and accept the consequences of the way she has chosen to manage her finances.

MrsVietor if necessary refers to if we suddenly were in a dire financial situation. As in it is theoretically possible for us to live there, with or without DM but we would not be planning for this if disaster does not strike i.e. lost jobs etc.

Thanks CheesyMother but IHT is only above a threshold? So if the 175k 'estate' gifted does happen to rise about the threshold then of course we would pay IHT. Or are you saying the half we legitimately bought ourselves would also be taxed - that does not seem fair?

Gazelda she is not plotting. We are free to leave our 1 bed whenever however may not be able to buy a family home in our top preferred area that is all. So it would be moving slightly further out for our family home or staying put in our current area in say a 2 bed flat. We are not trying to con DSis - we will come to a fair arrangement by her too of course..

In a divorce scenario we would have a contract drawn up and in this situation DM would agree to downsize.

We came up with this idea but DM is very much on board as she thinks it is up to us if we want to take on any risk. Please can people stop accusing us of trying to con DM and DSis nothing will be done without it all being thought about with them!!