Selling to tenant - a thought

[RandomQuestionOfTheDay]

Random thought of the day. We let out DH’s old flat he lived in before he met me. Had the same tenant for about 5 years. Last time we remortgaged we checked whether the tenant would like to buy it, and he said he would at some point in the future, he’s saving up for the deposit (all via managing agent).

There are reasons now why we’d prefer really to sell it sooner rather than later. If we sold it to him we’d sell it below the market price anyway. So I was wondering if instead we could sell it to him at market price but gift him say £10k on exchange towards the deposit? Win- win?

I think house builders do something similar when they advertise a ‘mortgage contribution’, it must help shift stock without down-valuing the other houses left to sell.

It would still be below the stamp duty starting point so no extra cost for the tenant there. We’d have to pay capital gains tax on the full market value so extra cost to factor in for us.

And your solicitor was correct in advising you on your situation. HMRC rules market value is used when selling to a connected party. There are other scenarios where this is the case, hence the questions, but no it is not true that CGT is always calculated on market value. If you're not selling to a connected person (most types of family members, but not all) then your CGT is calculated using sale proceeds less allowable costs. As an accountant I'd challenge any solicitor who says otherwise, CGT is an accountant's territory.

My DH is an accountant and we deducted all allowable expenses. The questions on HMRC form though is the same though regardless of who you sell too.

I'm not sure what else you want someone to say that hasn't already been explained to you. HMRC aren't changing the form based on who you sell to, so yes of course the questions are the same but the fact is you had to use market value because you sold to a connected party, this is not the case for the OP who is selling to an unconnected party.

caringcarer I think this is the relevant part of the Capital Gains Manual (I'm not an accountant though) - see connected persons.
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14530

I guess the tax office could argue that it was a gift????? But the value of a property isn't set in stone, and someone might sell at a very low price because they were desperate for the money.

One potential pitfall might be that the tenant/buyer’s mortgagee might not like part of the deposit coming as a gift from you rather than savings.

We got a gifted £7k from our new build company, it's written in the contract as part of the deposit, it was no problem. Just run it by a solicitor sure it will be fine, what a lovely thing to do 🙂

We gifted DD1 a huge amount for her flat deposit. We sold a house to do it. Paid CGT on the proceeds less allowances. It wasn’t that easy to sell so we did take a bit less but we wanted it sold as she needed the deposit! No one queries £10,000 under for a quick sale when the house needs a bit of TLC as it had been rented out. If we had reduced it by 1/5 of its value, that’s surely a different matter? However ,realistically, who actually checks? But £50,000 under is surely tax fraud? Market value is within reasonable parameters given condition, number of potential buyers and mortgage availability.

We will be paying CGT in identical circumstances soon. The house took a £15,000 price hit due to the mortgage rate hike and buyers struggling to get a mortgage. Other buyers offered even less. So what is market value? What you can actually get for it! Not a fantasy valuation that doesn’t take circumstances into account.

I thought that might be why they don’t like it (hence specialised mortgages that deal with it), but then how many deposits come from bank of mum & dad?!

Banks might not like it because if the landlord is desperate to sell there may be issues with the property.

And to answer various PPs - yes who is to say what market value is, it’s impossible to estimate at the moment. I also would take estate agent valuations with a pinch of salt, there’s one in the same block trying to sell for 20% more than I’d guess they are worth, and that’s after it’s already been reduced. I assume the mortgage valuations are a check here, as no doubt they are coming in lower to protect banks in a falling market.

So basically it would to be a ‘market valuation’ that will stand up to a bank valuation, with x% back as a gift to solve the potential deposit issue. And if I was a tenant who wanted to buy the flat anyway if I could just scrape together the deposit I’d think that was a good deal. Subject to being able to afford a mortgage that will be significantly more than the rent.

We’re talking a £200k flat here not a £1m penthouse.

I’m looking at options here and have enough extra thoughts, thank you. Those of you who are feeling argumentative can go and direct your energies elsewhere now.

What a typical reply! So the owner is offering to give their tenant money off and taking a hit on the capital gains and your answer is “they have been paying your mortgage off for the last 5 years”. It makes me laugh that you see this so one sided. No body forced them to rent the property, they have been provided with a home for the last five years, completely maintenance free, they’ve had no worries about insurance or mortgage rates, but you still see it as greedy landlords having their mortgage paid!

I don't know whom you're commenting to @Lyraloo but I do think that if someone who wants to become a LL can't see or accept that a tenant is actually paying off their mortgage as a LL, then they should stay away from tenants altogether because this attitude is probably a red flag that they might be the type to leave them in poor housing for their own profit. Someone who thinks "but I put a roof over your head" sounds kinds of abusive to me.

LLs have an extremely bad reputation - globally - and the only thing the good LLs can do (because there are good LLs) is to continue being good business people - good business people today are human and honest and understand what "power dynamics" means.

Thank you for your completely judgemental reply. As it happens I’ve been a landlord for the last 8 years. In that time I’ve had the same tenant. She constantly tells me that she is so grateful to have me as her landlord. My house is very well maintained and also as she reports any problem I send out the relevant tradesperson. Last year she asked if she could paint the walls in the lounge and put down Laminate floor, not only did I pay for the flooring but I paid for the paint, brushes etc and sent her flowers for doing the painting. So stick your nasty judgmental comments where the sun doesn’t shine! For most of us now, we could earn more in income from selling and investing the money, but my tenant has a small child who has never known any other home and my tenant wants to stay, so I don’t want to force them out just so I can earn more money. Maybe you’ll think twice about judging someone you don’t know because of your very blinkered opinion!