Buying a house is one of the biggest financial decisions you can make, and when it involves buying your parent’s house at a discount, the situation can seem even more complex. Whether it’s a way to help you get on the property ladder or an early inheritance from your parents, purchasing a property this way, comes with its own unique challenges.

In this article, we will explore whether how you can buy your parent’s house below market value, the potential tax implications, and legal aspects you should be aware of.

 What Does “Below Market Value” Mean?

 Although you would call it a discount, through the eyes of a conveyancing solicitor, this discount would make the property you are buying worth, less than market value. When we talk about buying a house “below market value,” we’re referring to purchasing a property for less than what it’s worth on the open market. For example, if the house is valued at £300,000 (by a RICS Valuer and not necessarily an estate agent), but your parents offer it to you for £200,000, the £100,000 difference is considered a discount or a gift.

Yes, You Can Buy Below Market Value – But Here’s What to Consider

While it is perfectly legal to buy your parent’s house at a reduced price, several factors will come into play:

• The Gifted Amount and Inheritance Tax

The difference between the market value and the price you pay is viewed as a gift. In a way, this gift is no different in principle to when parents would help their children buy a completely independent property, with a gifted deposit.

Although no ‘money’ has been gifted in the case of parents selling their property to their children at a below market value, this is still treated as a gift by HMRC. Gifts made by your parents within 7 years of their death could be subject to inheritance tax. If the discounted amount exceeds the current IHT threshold (known as the “nil-rate band”), tax may become payable by your parents’ estate.

Understanding this rule is crucial when planning the sale, as it may affect your family financially in the future.

It is important to remember that, most of the time, a conveyancing solicitor is not an expert in Tax Law. You will therefore require specialist advice here from either a Tax Advisor or a Private Client Solicitor before making a decision in this regard.

• Stamp Duty Land Tax (SDLT)

Many people believe that if they are buying a property below market value, they can avoid stamp duty, but this isn’t always the case. Stamp Duty Land Tax is based on the Consideration or the market value in some cases, and not necessarily the reduced rate. You should carefully plan this before committing to purchase the property.

• Mortgages and Lenders

If you need a mortgage to buy your parent’s house, the lender would require assurances that the in the event of your parents becoming bankrupt in the next 7 years, the property being transferred to you will not be treated as part of their assets which could be pursued by any creditors.

Typically, this will be dealt with by way of a Declaration of Solvency and an appropriate indemnity policy.

• Deprivation of Assets: What It Means for Your Parents

If your parents are selling their home to you at a significantly reduced price, the relevant Local Authority would have a keen interest in this transaction, particularly if your parents later apply for state-funded care. This is known as deprivation of assets.

Essentially, the authorities may argue that your parents sold their house for less than it was worth in order to avoid paying care fees. If this happens, they could reverse the transaction or take other legal action to ensure your parents’ assets are used to fund their care.

• Capital Gains Tax (CGT)

In some cases, Capital Gains Tax may be due if the property is not your parent’s primary residence. CGT applies when an asset is sold for more than it was originally bought for, and if your parents’ house has increased in value over time, this could be a factor.

However, if your parents have lived in the house as their main residence, they would likely be exempt from paying Capital Gains Tax.

Pros and Cons of Buying Your Parent’s House Below Market Value

Now that we’ve covered the technical aspects, let’s weigh up the pros and cons of purchasing your parent’s house for less than it’s market value.

Pros:

• Financial Benefit: You get a house at a reduced price, which can make it easier to get on the property ladder or make your monthly mortgage payments more affordable.
• Gifted Deposit: Many lenders accept the discount as a gifted deposit, which can reduce the amount of deposit you need to provide upfront.
• Family Arrangement: It can be a helpful arrangement for both parties, especially if your parents are looking to downsize or pass on wealth in a tax-efficient way. 

Cons:

• Inheritance Tax: If the gifted amount is large, it could result in inheritance tax being due if your parents pass away within 7 years of the sale.
• Care Home Fees: Selling the property at a discount may impact your parents’ ability to claim state-funded care if they need it later in life.
• Capital Gains Tax: If the property isn’t your parents’ primary residence, selling at a discounted rate could trigger CGT.

How to Protect Yourself Legally and Financially

To ensure you and your parents are fully protected during the sale, it’s vital to get professional advice. A conveyancing solicitor can help manage the legal aspects of the sale, making sure that all necessary paperwork is completed and that any potential tax liabilities are accounted for.

Additionally, consulting with a financial adviser who understands property tax and inheritance law can help clarify the best way to structure the sale. This could prevent costly mistakes down the line. 

Conclusion: Should You Buy Your Parent’s House Below Market Value?

In summary, buying your parent’s house below market value can be an excellent opportunity, but it comes with a variety of legal, tax, and financial considerations. Before proceeding, it’s important to understand the potential tax implications, particularly around inheritance tax and stamp duty. You’ll also want to ensure your parents are not disadvantaging themselves in the future, especially regarding care costs.

Working with an experienced conveyancer and seeking advice from a tax professional will ensure that the transaction is smooth and beneficial for both you and your parents. By approaching the situation carefully, you can avoid any unpleasant surprises and enjoy the benefits of purchasing a home at a favourable price.

Please note that the purpose of this blog post is to act as a useful piece of information for research purposes and is not intended to replace sound, legal advice tailored to your personal circumstances. You are therefore not to rely on this information when making decisions and you must seek the advice from a qualified professional before doing so.