Over the past few years the government has introduced a variety of Help to Buy schemes to help first-time buyers and even though the 2017 budget abolished stamp duty on properties up to £300,000, many are struggling to build up a deposit.
It’s not uncommon to see parents helping prospective first-time buyers raise the funds required for a deposit, taking a loan from the bank of mum and dad is one of the only ways people can secure competitive mortgage rates.
Alongside this, some parents may want to sell any extra properties at a discounted price to their children to help them on to the ladder, even going as fair to selling their property to a son or daughter for as little as £1.
However, this may seem like an option that’s too good to be true and unless you know just what fees and taxes could be involved, it often can be.
While it is possible to transfer your property to your son or daughter for £1, the entire process and any extra costs associated depend on a variety of factors.
One of the main complications of selling you home to your son or daughter for a lower than market price is a mortgage attached to it. If the mortgage has already been paid off, then you own the property and can sell it for whatever value you like.
However, with a mortgage tying the current owner to the property, they need to be able to pay it off before they can transfer the ownership to their son or daughter. This may mean taking out a separate loan to cover the rest of the mortgage, further complicating the process.
Selling a property to an immediate relative allows the seller to cut Stamp Duty due to a gift exemption in the rules, this means that the tax is only calculated on the purchase price and the rest of the difference between purchase price and market value is considered a gift.
The 2017 Autumn budget abolished Stamp Duty for first-time buyers on properties up to £300,000, so this is no longer much of a concern.
However, if you’re selling a property to an immediate family member that is not a first-time buyer, they wouldn’t have to worry about Stamp Duty as the difference gifted. For example, if the property is worth £200,000 and it is sold £1, then £199,999 is considered a gift.
If given as a gift, it is important to remember that if you were to pass away within the next 7 years, your family member will have to pay inheritance tax on the property if its value exceeds a threshold of £425,000.
Capital Gains Tax
If the property you are selling is not your main home, then you will be liable to pay Capital Gains Tax, regardless as to whether or not you sell it to a close relative. The rates you will have to pay are directly associated to your Income Tax status, if you are on a basic rate, then it will be around an 18% tax, whereas if you’re a higher-rate taxpayer it will be 28%.
The amount you pay is calculated from the market value of the house and not the discounted amount you are selling it for. For example, if you sell a property for £1 and it’s worth £200,000, as a basic rate tax payer you’d be subject to Capital Gains Tax of around £36,000.
Therefore, if you’re deciding to sell one of your other properties to a close family member, it is best advised that you calculate just how much Capital Gains Tax you’ll be expected to pay.
Whether you’re selling an extra property or you’re struggling to keep up with mortgage repayments, selling your house to a close family member at a heavily discounted rate may seem like a viable option. However, if you’re not careful, then the confusing and convoluted tax implications alongside the sale, may leave you severely out of pocket.
Selling your house to a close relative may cut down on overall costs associated to estate agent’s fees and legal costs, however our service already covers these fees for you.Back to all articles