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Retirement

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Original poster

Retirement finance, sell house to children?

34 replies

Felinefancier · 06/08/2022 08:07

I plan to retire when I turn sixty next year. I am divorced with no Pension.

My long term strategy of
investing in property instead has been successful.
I've worked hard and now own four properties, two of which are mortgage free as is my own home.

My plan is to live off the net income from two of the rental properties and sell the unmortgaged ones to my children - aged 27
& 29. (They would never be able to afford houses otherwise. Both are currently single and child free but in relatively low paying, insecure employment.)

I will 'lend' them the money to buy the houses in the form of interest only mortgages. They will pay interest to me until I die (interest rates reviewed every five years) and then they will inherit the houses. I will register the mortgages at the Land Registry so that if they get married or cohabit, my interests are protected.

I have 'run the numbers' with both of them and they can afford their mortgages. Both houses are three bedroomed so they can get lodgers if necessary.

If they choose to sell the houses they will repay the mortgages and I can use the money to buy something else.

My estate is left to them in equal shares in my will and I have no other dependants.

Has anyone got any experience of doing anything like this? Are there any potential pitfalls that I haven't considered, eg inheritance tax? Is there a more tax efficient way to arrange my affairs?

OP posts:
superram · 06/08/2022 08:13

You need to see a professional as the best way to avoid tax would be you gifting them the house and you living for 7 years. However, that doesn’t protect your assets.

Appleplumcrumble · 06/08/2022 08:16

My in-laws considered doing something similar to this, in the end it didn't work out and we didn't go ahead, but for unrelated reasons. The only thing I would say is that if you are not transferring the properties to their names (you talk about them still inheriting the properties later) then you are renting them to your DC and it's not a mortgage? They will also still pay inheritance on them - I'm not sure if this is something you are trying to avoid for them, or not?

HMSSophia · 06/08/2022 08:20

I think you're lacking in generosity to sell rather than give your 2 "spare" houses to your DC.

BigDayToday · 06/08/2022 08:23

HMSSophia · 06/08/2022 08:20

I think you're lacking in generosity to sell rather than give your 2 "spare" houses to your DC.

But they're not spare, they're the OPs retirement fund. Would you give your children your pension? What then would you live on?

AlwaysLatte · 06/08/2022 08:24

I think you're lacking in generosity to sell rather than give your 2 "spare" houses to your DC.
We have also loaned money to the two eldest to buy their own homes, but whilst we could have afforded to buy them for them, we would have been without an income, which we had previously used the money for. So unless the OP has another way of getting enough income without it that wouldn't work.

LizzieSiddal · 06/08/2022 08:25

Agree with *@HMSSophia
You said you will be living off the income from the two rental properties so why not just give the other two properties to your Dc?

Frenchfancy · 06/08/2022 08:25

Surely it is better to sell the 2 houses and gift DC enough for a deposit. That way they get to decide which house or flat they buy rather than you dictating it.

Original poster
Felinefancier · 06/08/2022 08:36

Thanks guys.
I will be transferring the properties into the DC's names so they will own the properties. I will be registered at the land registry as a mortgagor.

The net income from the two rental properties after paying the mortgages isn't enough for me to live on. Have to take into account the fact that I might have care costs later in life.

Both daughters have seen houses and are keen to buy them. They both helped in renovating the houses.

OP posts:
Lindy2 · 06/08/2022 08:37

How about this as a slightly less complicated plan.

You sell the 2 houses to your children but at a discounted price so they can afford them. The difference between the discount value and market value would be a gift for inheritance tax purposes but as long as you live for 7 years after the gift it will no longer be taxable.

Your children take out real mortgages to buy the properties but being affordable because they got a discount on the house price.

You receive the lump sum payments from the mortgage provi see to use as your retirement fund. Perhaps but another rental for income and an additional future inheritance for your children.

Obviously it depends on how the actual numbers stack up but it was what came to my mind as an option.

Original poster
Felinefancier · 06/08/2022 08:43

Lindy2 · 06/08/2022 08:37

How about this as a slightly less complicated plan.

You sell the 2 houses to your children but at a discounted price so they can afford them. The difference between the discount value and market value would be a gift for inheritance tax purposes but as long as you live for 7 years after the gift it will no longer be taxable.

Your children take out real mortgages to buy the properties but being affordable because they got a discount on the house price.

You receive the lump sum payments from the mortgage provi see to use as your retirement fund. Perhaps but another rental for income and an additional future inheritance for your children.

Obviously it depends on how the actual numbers stack up but it was what came to my mind as an option.

Thanks I have considered this option but neither of them are eligible for mortgages because of their are low wages and uncertain employment status (zero-hours contracts).

I'd be happy to implement your solution if at any point in the future they can actually get mortgages!

OP posts:
Fireyflies · 06/08/2022 08:45

I think it sounds a reasonably well thought through plan. There is some risk if they marry and then divorce later down the line that although your mortgage is protected they have to split the equity uplift with their ex so have to sell the house. And I guess there's a possibility that they have a pay rise and want to pay you off faster, or decide they'd prefer a repayment mortgage deal with a bank, or have a fall in income and need to pause paying you for a while. You would also need to agree on any expenditure needed in the house. But it works well against inheritance tax as your kids would become the owners of the properties sooner rather than later.

SuperCamp · 06/08/2022 08:47

As you are selling them the houses you will presumably be liable for Capital Gains tax on the sale price?

If you sell them the houses they will be liable for Stamp Duty (unless the price / value is below the threshold for FTB).

I think if you give them the houses there is no CGT?

Can you / they protect their ownership in another way?

Do they need / can they afford the upkeep on 3 bed houses?

Can you actually afford to live off the two rentals? With overheads, mortgage etc?

Can you actually afford to essentially give away two houses? Given that you could be needing to fund 30 years of retirement? Are you eligible for full state pension?

Original poster
Felinefancier · 06/08/2022 08:51

Fireyflies · 06/08/2022 08:45

I think it sounds a reasonably well thought through plan. There is some risk if they marry and then divorce later down the line that although your mortgage is protected they have to split the equity uplift with their ex so have to sell the house. And I guess there's a possibility that they have a pay rise and want to pay you off faster, or decide they'd prefer a repayment mortgage deal with a bank, or have a fall in income and need to pause paying you for a while. You would also need to agree on any expenditure needed in the house. But it works well against inheritance tax as your kids would become the owners of the properties sooner rather than later.

50% of marriages end in divorce, mine did. I have considered the fact that any spouse of the children may get half of the equity in the event that they divorce but I don't think I can do anything about this.

I've been very clear with them about what might happen if they divorce, and I think they understand that risk.

OP posts:
downwiththebees · 06/08/2022 08:54

Of course if nobody was allowed to buy 4 houses then perhaps house prices wouldn't be quite so crazy and you're children would be able to buy their own houses...

SuperCamp · 06/08/2022 08:55

I think there are rules about selling to family at below market value. You can give property but a whole raft of rules come in if money changes hands.

So the interest they pay you will make up what you need to live on?

What happens if they lose their income altogether for some reason? It seems unlikely that ‘mortgage to mum’ will be eligible for Universal Credit.

I think you need to go through the whole plan with a qualified advisor / accountant.

Fleur405 · 06/08/2022 08:59

Have you factored in Capital Gains Tax on disposal of the asset? Then as pp said there may be stamp duty to pay. In both cases it’s important to be clear what the true market value is v the price being paid (I.e. the value of the loan). You definitely need to take some proper advice before implementing the scheme. I think you also need to understand what will happen when you die as there may be tax issues for your executors to deal with.

Original poster
Felinefancier · 06/08/2022 08:59

Thank you Fireyflies
You've made some really good points.
........

As you are selling them the houses you will presumably be liable for Capital Gains tax on the sale price?

Yes, I am liable for CGT but I'm ok with this

If you sell them the houses they will be liable for Stamp Duty (unless the price / value is below the threshold for FTB).
Price is below threshold in both cases

I think if you give them the houses there is no CGT?

Can you / they protect their ownership in another way?

This is the big question, one of them had an unsavoury BF for a while and I don't want them to get ripped off.

Do they need / can they afford the upkeep on 3 bed houses?
Yes with lodgers which they are OK with

Can you actually afford to live off the two rentals? With overheads, mortgage etc?

Not quite that's why I need the interest income from the mortgages

Can you actually afford to essentially give away two houses? Given that you could be needing to fund 30 years of retirement?

I'm not exactly giving the houses away, I'm only giving away the capital appreciation. They will be paying interest on the the current sale price.

Are you eligible for full state pension?

No I took long contribution gaps while I was bringing up the children so I will only get a small pension when I turn 65

OP posts:
SuperCamp · 06/08/2022 09:00

downwiththebees · 06/08/2022 08:54

Of course if nobody was allowed to buy 4 houses then perhaps house prices wouldn't be quite so crazy and you're children would be able to buy their own houses...

Meanwhile women, especially single parents, are the most likely not to have been able to benefit from work related pensions and need to rely on enhanced benefits beyond retirement age.

’buy property’ was advised as a pension strategy for decades.

LizzieSiddal · 06/08/2022 09:00

To avoid having to pay any Capital gains tax now, would it not be cheeper to just rent the houses to your children?
When you die, presumably they’d be inheriting all of the houses, and may well have to sell one or two of them to pay Inheritance tax, but they’d then own the houses they actually live in.

SuperCamp · 06/08/2022 09:02

OP, you can’t get your (reduced) state pension til 67.

SuperCamp · 06/08/2022 09:10

Is there a way of investing differently in your DD’s? Support them in a training course that will give them a good income? At their age they may settle down and start motherhood and then find that they never have a chance to build a pension.

I appreciate that you want to ensure some security for them. But this plan is at significant cost to you.

Over the course of your retired years (30!) your rental houses may need new rooves, rewires, 3 new boilers each…

NotDavidTennant · 06/08/2022 09:12

Have you considered what happens
when the houses increase in value? If you had to sell then you would only get back the original 'mortgage' value, anything above this will belong to your DC and will be considered a marital asset if they were to divorce.

Oblomov22 · 06/08/2022 09:15

Interesting. I'm trying to see the best way forward but all have their cons.

Original poster
Felinefancier · 06/08/2022 09:15

NotDavidTennant · 06/08/2022 09:12

Have you considered what happens
when the houses increase in value? If you had to sell then you would only get back the original 'mortgage' value, anything above this will belong to your DC and will be considered a marital asset if they were to divorce.

Thanks I have considered both these scenarios and they are risks I am willing to take.

I know this plan is at significant cost to me I'm doing it because they need the houses now, not when I die.

I also live alone in a 3-bedroom house, so if push comes to shove I can get one or two lodgers.

OP posts:
justasking111 · 06/08/2022 09:19

Felinefancier · 06/08/2022 09:15

Thanks I have considered both these scenarios and they are risks I am willing to take.

I know this plan is at significant cost to me I'm doing it because they need the houses now, not when I die.

I also live alone in a 3-bedroom house, so if push comes to shove I can get one or two lodgers.

Show quote history

It might be a risk you're willing to take but to be clear if this does happen your children may be homeless again.

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