Bank of Mum and Dad: Concessionary Purchases
Occasionally Mum and Dad own a family home which could be transferred to a son or daughter when Mum and Dad downsize. In these situations it is not uncommon for the parents to agree to transfer the property at undervalue, with the rest of the value effectively being a gift.
Mark and Helen own the family home worth £510,000 with a mortgage of £110,000 and wish to downsize to a new home worth £280,000. Their daughter Sophie is a first time buyer and would love to own the family home. They agree that Sophie will raise £400,000 on a mortgage and pay this to her parents for the family home where she will live. Mark and Helen will use £110,000 to pay off their mortgage. They will have a little left over after the purchase of their new home for £280,000, payment of stamp duty land tax, the costs of moving and other expenses.
Mark and Helen will be left with a mortgage free home that they bought for £280,000. Sophie will have a house worth £510,000 and a mortgage of £400,000.
What is the "price"?
It will be important to Sophie how her purchase is structured.
- If it arranged as a purchase for £510,000 with her parents gifting her the £110,000 (see Gifted Deposit below) then she will not benefit from first time buyers' relief for stamp duty land tax and will pay SDLT of £15,500.
- If it is a purchase for £400,000 (see Concessionary Purchase below) with first time buyers' relief the SDLT will be £5,000.
If the purchase is structured as a "gifted deposit" then the contract and transfer will record the higher figure, here £510,000. SDLT is due from Sophie on that full stated sum.
It is easy to understand this if it is a rich uncle and aunt who gift the money to Sophie for Sophie to pay to her parents. But here the gift is provided by her parents. "Real money" might not pass for the amount of the gift from Mark and Helen to Sophie, as it would only have to be paid back as part of the purchase price.
But a lender will often require the parents to sign a document confirming that the money has been gifted. The "chargeable consideration" for SDLT is then the full gross sum treated as paid. The gift and the gross price might be recorded on a completion statement. Or the "gift" (without money actually passing) creates a debt owed by the parents which is then extinguished when the property is transferred to Sophie (the chargeable consideration is then the actual cash passing plus the amount of the debt then extinguished).
Concessionary purchase / transfer at undervalue / gifted equity / family discount/ genuine bargain price
The arrangement here is the parents sell to Sophie for less than the market value. The contract and the transfer record the amount of cash passing. SDLT is then based on this lower figure if there is nothing else Sophie is giving in return.
This is simple, except that not all lenders will allow it to be done this way!
Obtaining the mortgage
Many lenders are uncomfortable lending against a property bought at less than market value. They might lock Sophie into a structure where she will end up being recorded as having paid £510,000 for the property.
Sophie will want to find a lender who will lend when the property is bought at undervalue. Lenders use terms like concessionary purchase / transfer at undervalue / gifted equity / family discount/ genuine bargain price. They will almost certainly want to be satisfied that Mark and Helen will not be living in the property, that there is no arrangement for the parents to be paid more in the future and that they do not have any retained interest.
Lenders sometimes confuse things by using terms like "gifted equity" and "gifted deposit" loosely. They can refer to odd things like the "registered value" or even "gifted deposit equity".
Confusion can also be caused by using the word "deposit" in odd ways. Sophie should not let that confuse her! Lenders sometimes confusingly call the difference between their valuation and their loan the "deposit". It is not really a deposit! It would be better to call it Sophie's "equity". Sophie should be clear that the lender is being asked to lend £400,000 against a property worth £510,000 which Sophie is buying at a discounted price of £400,000 from her parents.
Keys to achieving an SDLT saving
The keys to Sophie securing an SDLT saving are:
- Finding a lender willing to accept the property as security when it is transferred at a price less than its market value.
- That the contract and transfer can state the lower cash sum passing to the sellers.
- No document is required saying that a gift of cash is made to the buyers.
- Using solicitors experienced in these arrangements.