Buying in-laws property for them to rent

[Gogodonu]

My PILs who are in their early 70’s are cash poor and would like to free up some equity from there house. They own the property and it’s worth approx 200k.

My husband would like to buy the property from them, and then they rent it from us at current market value.

Does anyone have any advice on this or forsee any problems? Thanks

You would pay cgt on it when it was sold as it would be an asset.

Tax implications are numerous.

3% extra stamp duty on purchase

Why are they so cash poor ? have they explored whether they are eligible for any benefits to top up their income rather than selling their home? What happens when all the cash is gone . I guess it will last a while even if paying rent but they may need to consider that when it is gone it may not be possible to apply for housing benefit when renting off a close relative . Will you be willing to let them live rent free if it gets to that point?

If you and DH ever got divorced, it would be considered a marital asset.
if they need to go into care, it could be considered deprivation of assets.
Who would be responsible for maintenance?
Dh would have to pay income tax on the rent.

Do they not have enough money to live comfortably?

I can't see how it would be deprivation of assets, it's not as if they are giving the house away. I suppose a local authority could ask where the money has gone but as long as it has been spent reasonably there wouldn't be a problem. I suppose it could be deprivation of assets if it was sold below market value.

You would have to declare the rental income and pay tax on the profit and CGT on sale

Additional stamp duty for a second home

you will need to charge market rent

Could they just consider downsizing instead to free up some cash?

If they are cash poor, is this equity release actually going to benefit them if it means having to pay full market rent for the rest of their lives? If they live another 20 years at home, this could easily mean they pay the equivalent of the entire current value of their home in rent to their son, who also retains ownership of the asset. They lose all control of the property and are ultimately at the mercy of the rental market, permanently forgoing the ability to own a home again. If you and your husband divorce then it's possibly (likely?) the house would be sold.

It doesn't appear to be a good solution for them and is loaded with risk, but I can see clearly the benefits for your husband. It feels exploitative.

Sounds like a lovely idea until you realise that HMRC slare all over little schemes like this and you become subject to rental regulations in housing law. Second home stamp duty rate, rent must be market rate and taxed as income, you're obliged to follow any landlord licencing schemes that may be / have been introduced. Yearly gas safety checks, 5 year electrical safety checks , identity/ right to rent checks etc etc . Sounds stupid but they alll will apply and there's a reason landlords are selling.

My main concern would be how they would fund their care if they needed it in future.

Agreed but then any buy to let is exploitative( although I appreciate necessary for some) but does seem exploitative in particular when it is a close relative. It could leave relative no money in 10/ 15 years time to pay for a good care home if they need one, no money/ property to leave to kids if they don't need to pay for care . I guess no one knows how the future is going to look for them really as so many things are uncertain. Do they want to free up cash so they can travel etc?

Is the plan for you to buy it from them by getting a mortgage against it? If you have enough for a deposit on that mortgage, would you not be better (from a tax perspective) to loan them the deposit money and them pay you back each month (with interest)?

Otherwise -
Stamp duty
Tax on rental income is seperate from other income.
Mortgage interest
Capital gains
What if they cant pay all the rent?
Care costs later on
Potentially, the poperty falls in value - its difficult for elderly parents to deal with the upheaval of frequent redecorating, etc., they dont want to "bother you" by pointing out maintenance and repairs that need doing, or "theres nothing wrong with it, leave us be in our home", or whatever.

Bit just cruch the numbers - they would get a lump sum of £200k, earning interest of a bit below the bank base rate (and paying tax on it), and spending a bit if it each year. You would have a mortgage, paying interest a bit above the bank base rate.

How much is market rent?

If they have £200k cash from the house to last them say 20 years at £10k per year, half of which (or more) goes in rent, while you pay tax on the income, will pay CGT, etc, it may be better for them to look for a better equity release plan. They are not as bad as they used to be.

Mortgage companies don’t like anyone doing this.