Updated: February 23, 2022

Getting a Mortgage When Buying Property From Family

Buying a house from a family member and need a mortgage? Find out how to buy a house under market value, and other implications, in our in-depth guide.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Expert

Updated: February 23, 2022

Buying property from a family member might seem simple, but it comes with its own complexities. Often, it’s seen as a way for parents to help their children get on the property ladder by buying a house under market value and saving on other costs.

It can be a good way to take the step into homeownership but, as what is sometimes described as a ‘non-arm’s length transaction’ it also attracts greater scrutiny than a straightforward sale.

We’ve put together this guide to buying property from family members, and here, you’ll learn how to go about the transaction, what the tax implications will be, and much more.

Can you buy property from a family member?

Yes, of course you can. It’s actually quite a common occurrence as more and more parents try and help their children get their feet on the property ladder. It’s also a perfectly legitimate way of buying a property below market value.

This type of transaction would be considered a concessionary purchase by a mortgage lender. As such, they could be willing to accept whatever ‘family’ discount has been applied to the sale as the buyer’s deposit.

So, for example, if your parent’s house is valued at £300,000 and they agree a sale price with you of £200,000 then the £100,000 difference acts as your deposit in the eyes of a lender.

It’s not all good news, though. There’s a number of potential tax and legal implications involved with buying a property from a family member below market value and not all lenders are willing to consider mortgages in such circumstances.

All of this is discussed in more detail in this article. But, from the outset, it’s important to seek the advice of a mortgage broker with experience in this area. They’d be able to identify which lenders will look favourably on these types of applications and help guide you through both the legal and/or taxation requirements.

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How to get started

From a legal perspective, it’s usually advisable to treat the transaction in the same way as any other house sale, so following these steps is recommended….

  • Get a Homebuyers report or structural survey
  • Conduct a search to find any potential implications from unknown planning permissions
  • Instruct solicitors (both parties should use different solicitors to avoid a conflict of interests)

Appointing an independent third party is also considered quite a shrewd move for property sales between family members. With the best will in the world, there’s always the risk things could become fraught and emotional.

But the transaction and discussion’s begin before approaching a broker or legal professional so it’s wise to agree to some ground rules and logistics before getting into the details of the sale.

Purchasing a property from a family member below market value

Whether you’re the buyer or the seller, a property sale between family members needs careful planning and some simple steps putting in place. This should include:

  • Agreeing which professionals will be required
  • Establishing a realistic timetable for the transaction
  • Discussing how you will deal with input or interference from other family members
  • Putting everything in writing to avoid disputes or misunderstandings

It’s easy for both parties to get caught up in the excitement of the transaction and treat it too casually. You need to try and avoid this. Before you agree to sell your home below the market value:

  • Get advice from a financial advisor and an experienced mortgage broker
  • Have the property valued by at least three estate agents so all parties are clear on the true value of the asset before any discussion over the sale price takes place

Finally, whatever you do, don’t talk about it over a glass of wine or a couple of beers. The best way to avoid the transaction from being handled in a casual manner is to treat it with the same respect as you would if selling to a stranger. By doing this and sticking to the advice above, the sale can be compartmentalised and you reduce the risk of it becoming toxic.

How a broker can help

If you’re buying a house from someone in your family – particularly if the price you’re paying is below the market value – you’ll almost certainly not meet the criteria for a mortgage with a high street lender.

Due to the complexities of the transactions and the additional scrutiny it will face, the best route to the right lender is to find a broker who specialises in mortgages in these types of situations.

This is where we can help! Our unique broker-matching service is designed to match you with an advisor who has the right level of expertise to deal with your specific needs. If you make an enquiry we can arrange for an appropriate broker we work with to contact you straight away.

Tax implications

Selling a house below market value can give rise to additional scrutiny to ensure any transactions are not being orchestrated to evade tax. It’s important to have a full understanding of what any tax implications could apply both during and after your purchase is completed.

Inheritance tax

If you’re selling a property to a family member below market value, the difference between the sale price and the true market value of the property will be seen as a ‘gift’ by HMRC for inheritance tax purposes.

So, using the example given above, the £100,000 difference between the property’s sale price and value would be classed as a gift or, more specifically, a Potentially Exempt Transfer (PET).

Gifts above the value of £3000 are known as Potentially Exempt Transfers (PETs). They carry no immediate tax charge, but if the donor dies within 7 years of giving the gift, some or all of the amount becomes liable for inheritance tax (IHT). The amount of tax due is calculated according to a sliding ‘taper relief scale’.

The threshold for the nil rate band of inheritance tax in the UK is £325,000. You will pay 40% on anything above that amount.

Gifts with reserved benefit

Parents may sell a house to their children but continue living in it. This would be classed as a gift with reserved benefit (GWRB). Under these circumstances, the value of the property at the time of the parent’s death would be subject to IHT unless the parents have paid rent at market rate since completion of the sale. Some lenders will insist that vendors and/or all residents living in the property prior to the sale must move out upon completion.

Pre-owned asset tax

Where GWRB benefit rules don’t apply, pre-owned asset tax (POAT) almost certainly do. This is an annual tax paid by individuals who have gifted an asset but continue to benefit from it.

Capital gains tax

If you sell property to a family member which will not be used as their main residence, you will be liable for capital gains tax (CGT). The rate you pay for CGT will be the same as your income tax bracket. The amount of CGT is calculated according to the market value of the property, not the price you sell it for.

So, again, using the example above, as the seller of the property the market value of £300,000 would be used against whatever the original purchase price was for CGT purposes and not the below value sale price of £200,000.

Stamp duty

Currently, if you buy a home from a family member for less than £125,000 to use as your main residence, no stamp duty will be charged. If you pay more than that or if you already own another residential property you will need to pay stamp duty.

So, buying a property below market value could potentially save you money here.

Other considerations

In addition to the potential tax implications of buying property from a member of your family, there’s a number of other areas that require careful deliberation, if they apply:

Deprivation of assets

An individual who requires social care but has assets valued at more than £23,250 must pay some or all of their care costs. Deprivation of assets is the term used to describe the act of deliberately transferring assets to a third party to get rid of them and force the cost of care on to the local authority.

Where the local authority believes a person has intentionally deprived themselves of their home for this purpose, they will treat that person as if they still own it when calculating their entitlement to care costs.

Bankruptcy

If your parents are declared bankrupt after selling their property to you, the Receiver may seek to overturn the sale and use the property to settle their debts.  They can also seek approval to reverse previous under-value transactions in certain situations.

One or both of your parents outlive you

It is possible that you will die before your parents. If the intention is for your parents to continue living in the property after the sale, you will need to consider what would happen under these circumstances. Ownership rights will be passed to your beneficiaries so you may want to amend your Will and Testament to include your wishes should this occur.

Separation or divorce

If you’re married, any property you own is a matrimonial asset. In the event that you later divorce, your assets, including the property you bought from a family member, might be divided between you and your ex-spouse.

Family disputes

You may not want to think about it, but you and your parents will need to consider what practical steps would be taken in the event of a future falling out with your parents in the future. You may also want to consider clarifying the details of this purchase with other immediate family members – such as your siblings to avoid any future fallouts or claims to the property.

Get matched with the right broker today

Buying property from family has numerous benefits but is also something of a minefield due to the sheer volume of additional considerations required. Some lenders will not entertain a mortgage for buying property from a family member, while others will consider the application but will have strict criteria.

It’s not advisable to go searching for lenders yourself as knowing which finance houses to approach requires a working knowledge of those most likely to approve your application. Too many searches on your credit file can also adversely affect mortgage applications, and when you have niche requirements to begin with, limiting your pool of lenders still further could result in you failing to get approval.

We work with mortgage brokers that cover specialist areas, including finding a lender when buying property from a family member. Mortgages for this purpose require a comprehensive understanding of the unique circumstances of your application and in-depth knowledge of lenders criteria.

With our broker-matching service, you can find the right broker and the best deal for you. Give us a call on 0808 189 0463 or make an enquiry and we will arrange for an expert to speak to you straight away for a free, no obligation, chat.

FAQs

Can I just take over my parent’s mortgage?

It’s not quite as straightforward as that. You can certainly help with their repayments if, for example, their retirement income is insufficient to cover them. To officially ‘take over’ a mortgage would require a change of the title. 

The process of taking over your parent’s mortgage is known as an ‘assumption’ and would require the lender to conduct certain credit checks and a review of the existing terms before agreeing to it.

Do I need to appoint a solicitor if I’m buying my parent’s property?

Yes, this is recommended. Remember, it’s important to stay in line with a regular property sale transaction, regardless of who the seller is. This would include both parties – the seller and the buyer – appointing their own legal representation, avoiding any fallouts further down the line.

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We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in all different Property Types. Ask us a question and we'll get the best expert to help.

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Pete Mugleston

Pete Mugleston

Mortgage Expert

About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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