Buy To Let Mortgage For Relative - Tax Implications - UK
My sister is just coming out the other end of a messy and protracted divorce. She has 3 children and despite many legal actions there's pretty much no hope of getting any support from the ex-husband.
She is currently living with the kids in a small flat but would like to move out to a 3 bedroom house with the kids.
She can afford a 20% deposit from the proceeds of selling the ex-family house (after legal fees) but she can't get a mortgage as she doesn't earn enough for the multiples required by the bank (she works part time as she also needs to look after the kids; 2 jobs, as a nursery nurse and teaching assistant).
I could get a buy-to-let mortgage as I have equity in my home and have 2 other houses I currently rent. I then charge my sister rent which I use to pay the mortgage - making no profit. After the mortgage is paid off I then change the deeds to sign over the house to my sister for free. I know my sister can afford it as the mortgage payments are close to what she currently pays in rent - plus I trust my sister of course.
What are the UK tax implications of doing this? If I sign the house over "for free", is my sister or I liable for capital gains tax?
Are there any implications to my sister giving me the 20% deposit on the house?
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I am not a tax adviser, so take this advice with a pinch of salt. I believe that you will be liable for Capital Gains Tax based on the increase in the market value of the house, even if you give it to your sister. You should be OK for income tax on the rent, if you won't be making a profit. If your sister gives you the deposit there should be no tax implications (unless she dies within 7 years with a large enough estate to be liable for inheritance tax, which sounds unlikely) -- but of course she's at risk of you deciding to just keep the money, and should probably take independent legal advice.
You might do better from a tax point of view and get a better interest rate if your sister can get a mortgage and have you act as a guarantor so that she qualifies for it -- that would put you on the hook if she failed to make the mortgage repayments, but that would be the case under your plan as well.
Note: I'm not a financial or legal professional. This is based on personal experience, and reading around the subject.
There are two possible routes.
Letting the house: Typical buy-to-let mortgages specifically exclude letting to family members, requiring you to use a regulated BTL instead, which may limit your options.
Before applying for any BTL, you would need to check the terms carefully, in case this restriction applies.
Co-ownership: As you've commented, the names on the mortgage and on the title must match. So if you both would be willing to have your names on the documents, and if your combined income is sufficient for the lender, then that may provide a solution. Of course, both of you would be liable for the mortgage, whoever actually pays it.
As for giving the house to your sister later: that's really one for a solicitor and/or accountant. If the house was let, you could be liable for capital gains tax, and in both scenarios, your sister could be liable for stamp duty; both would be based on the market value of the share in the house being bought and sold.
My advice is: this is complicated; speak to an expert!
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