Son wants to help his mother downsize but also make a sound investment. Any way around this interesting property investment conundrum?

[Tom Smith]

Hello All,

 

Thank you  for accepting me onto this amazing site. I am completely new to property development and my question is rather complex and specific. Much searching on google has not provided me with any answers and a local estate-planning solicitor has quoted me between 7-10 K upwards just for providing me with some initial advice which she warns might not even provide me with the answers I am looking for!

 

I hope that someone, somewhere may be able to offer their advice for a little less! So here goes:

 

My mother owns the freehold of a large semi-detached Georgian family townhouse at the end of a street in south west London (Richmond) with a spacious garden that wraps around the three sides of the house. My mother has recently been granted planning permission to build a new, architect-designed, semi-detached property at the side of the existing house.  The result would be that 2 separate properties would be created: the existing house would become a terraced property (with a slightly smaller garden, making it in-line with all the other gardens in the street) and the new smaller property (with a small garden of its own). The idea behind the scheme is:

To allow my mother to downsize by creating a bespoke, smaller property for her to live in, whilst maintaining the existing, larger family house as a rental property to provide her with a regular income (or even for potentially selling it at some stage if renting doesn't prove easy).

The overall cost of the project would be far too great for her to carry out alone, mortgages aren't easy to acquire at her age (74) and equity release is very costly, therefore I have suggested that I would provide half the capital as a joint project to help her get her bespoke house built, and also as a potentially nice investment for me for the future. If she were to take the practically easier route, sell up and look for a 3-bedroom flat to downsize into in this area, it would probably cost a good deal more than building a new 4-bedroom house on her own land, so this project does seem to be a no-brainer from a financial point of view. I do, of course not wish to underestimate the problems associated with a new build.

 

While I am very happy to be able to make this project feasible now by investing my own capital, even with the best will in the world, I could not afford to simply write-off my invested capital as a gift to my mother without some future hope of benefit. That is to say, I would hope to share in this project in the same way as I would if I were investing my capital in any other property. So, ideally, I would like to own half of the new property, equivalent to the amount I will invest : 50%.

 

The problem as I see it, is rather complex:

 

1. My mother currently owns the freehold of the entire property, including of course the land (garden) upon which the new property would be built,. There is simply no way that I could afford to both buy the freehold of the garden from my mother as well as investing in the building project.

 

2. If I pay for half of the new build, and therefore own half of the new property together with my mother, I will still not own the land on which the new house is built, as that will still belong to my mother. Of course, she could gift the land to me....BUT....

 

3. Since my mother would move out of the existing house and live in the new property, she would be seen to be "benefiting from it" by HMRC. This would create complications as regards inheritance tax. I am aware that gifts can be made from parents to children, and that my mother could gift me the freehold of the land, which would no longer be part of her estate after seven years. BUT, gifts from parents to children (ie. potentially exempt transfers) only work, tax-wise, if the parent will no longer benefit from that gift during the rest of their life, after the gift is made.

 

In order for that gift of the land not to remain a "gift with reservation", she would have to pay me an annual rental fee at market rate. In that way, after her demise, the gift of the land would not be included as part of her estate and would not be subject to inheritance tax. I assume the annual rental she would have to pay me, to satisfy HMRC, would only need be equivalent to my initial capital investment, so 50% of the market rent?

 

Would this model actually work, would it be legal and would HMRC look upon it kindly?

The second issue relates to the existing house. Part of my investment would be used to refurbish it for rental purposes, and again, I would like, as an investor, to gain something in return, such as a share of the freehold, or a share of future rental income. Would this be feasible?

 

The second way I can see of making this project work, should investing directly prove too complex for tax reasons,  would be to set up a discretionary trust in my name, loan the capital to the trust, which would in turn provide a loan to my mother to finance half of the new build. After my mother's demise, from what I have read, the amount loaned to the trust would then get repaid to the trust and hence to me, without any inheritance tax implications. Does anyone have any idea about this method and whether it would be a better way to finance this project than my investing directly? If one does make an investment via a trust, does the value of ones investment increase with time in line with property prices, or would the trust, on my mother's demise, simply receive back the exact same amount it invested in the first place? I am guessing the latter, since the trust is only loaning the capital, and is therefore not a part owner of the property.
 

I am not sure if I have explained this at all clearly!

To conclude, the basic idea is to come up with a workable model which would enable this project to go ahead: provide a smaller, bespoke house for my mother to downsize to and a rental income from the existing property, whilst simultaneously enabling me, her son, to invest my capital wisely for the future, whilst also mitigating my mother’s estate's inheritance tax liability. 

 

Would be extremely grateful for your thoughts. There may be other tax issues I have not even considered?

 

I should add that it is my parents intention to leave 50% of their estate to me (my father has already passed away) in any case.

 

 

Edited May 8, 2019 by Tom Smith

[lizzie]

If I were you I would seek professional advice from a tax planning specialist possibly at the same firm as your conveyancer.  It is not a conveyancers job to advice on tax.  

[Tom Smith]

Sorry, my mistake, it was a solicitor with experience in estate planning (not a conveyancer) that quoted me between 7-10K just for initial advice on this matter.

[lizzie]

 

1 minute ago, Tom Smith said:

Sorry, my mistake, it was a solicitor with experience in estate planning (not a conveyancer) that quoted me between 7-10K just for initial advice on this matter.

My mistake too sorry I misread your initial comment but thats the professional you need for a complex scenario such as you describe, the fee reflects the complexity perhaps? No-one is going to give you an absolute guarantee on something like this. Maybe shop around to find someone cheaper but cheap may not be best.

[Mr Punter]

I am not sure of your mother's age or state of health, but gaining planning consent and constructing a new house takes years rather than months time and she would be living alongside a building site for a fair while.

 

If you gain consent for the new house she could sell the plot separately without any tax liability and use the money to refurb her current house and perhaps invest in a flat as a buy-to-let.

[newhome]

I’m definitely no expert but my initial thoughts are that your mother will end up owning 1 house in total and another house as a part share with the other share owned by yourself as (presumably) tenants in common. To avoid the ‘gift with reservation’ issue and the fact that you are buying a share in her principle residence why don’t you buy a share in her existing property (it doesn’t need to be 50%) to release enough capital for your mother to build the new dwelling that will be solely owned by her? You will then earn a share of the rental income from the old house as will your mother that should tick both boxes surely? The refurb costs will be shared dependent on the share of the property each of you own. Seems a more straightforward approach to me? 

[Ferdinand]

OIt seems clear-ish. I think we and probably you need a bit more info.

 

IMO it not as unusual a situation as you seem to be thinking.

 

7.5k seems unnecessarily expensive. If you go to somewhere like Landlordzone or Propertytribes and talk to one of the professionals who advertises or sponsors there with a development specialism it could be a start.

 

So so we are talking the sort of swathe between say Chiswick and Surbiton. Richmond would be good. Hancock's Half Hour country.

 

It may be useful to take Estate Planning advice and Business Planning advice as separate elements.

 

The important thing is to find somebody who has done 20 nearly identical things before, ideally in London. I would probably be looking in eg Guildford or Sutton rather than eg Chelsea for my adviser. Very different rates.

 

Potential other factors involved

 

1 - Are there siblings or children who need taking into account in the transactions?

2 - I think a good flexible solution could involve creating a property company, probably for the investment property. Property can be injected and extracted at face value without tax implications iirc. Then your mum could gift you shares etc in tranches if necessary, or resign as a director, and you can appoint and unappoint Directors. You could inject the refurb capital, and your mum the property .. or a lifetime gift of half of it etc.

3 - Might be worth converting into 2 or 3 flats for resilience of future income. One tenant gone bad can create a 6-9 month dead spot in income. Managing tenants is increasing professionalised, it is easy to come huge croppers for trivial errors, and especially in London Councils are currently riding out like Wild Bill Hiccock on landlord hunts, sometimes with justification.

4 - Presumably you are dealing in values between say 0.5 - 1.5 million. At those levels, Stamp Duty .. especially with the plus 3% .. can be murderous in London. 

5 - Tidy thinking says that perhaps you want to own part of the investment property not part of your mum’s new one, though that raises the prospect of Inheritance Planning again.

6 - One way would be to develop the existing in a company, rent out or sell, and take the money out as income for mum or pension for you at 40k a year or tax free maximum over x years (or read back for 4 years). Or entrepreneur’s relief etc. But for these there are requirements in terms of having added value and done work.

7 - In general do stuff quickly and reach a new stable state .. as it is all changing, and political risk is around at present.

 

This is opinion only.

 

Ferdinand

 

 

 

 

Edited May 8, 2019 by Ferdinand

[scottishjohn]

providing there was a proper rental agreement ,the fact she has not actually paid you month by month and that it is deferred  to be paid on her demise , that should work . and all debts on an estate are paid before any calculation of inheritance tax

Is that not basically the same as equity release?

pretty sure something along those lines would work if constructed correctly ,maybe would need a limited company for the rental etc 

as ferdinand says ==opinion only

 

[Temp]

I also think you need professional advice but may not be easy to find someone with all the experience. 

 

In return for your loan (which would be deducted from her estate for IHT) you might consider asking her to leave a share of the house to your own children rather than to you. That way you also reduce any IHT payable on your own death. If you don't like that idea you might be tempted to ask her to gift "your" share to your children now, but beware there are complicated tax rules when gifting property. They might end up having to pay IHT tax _now_ rather than when she dies.

 

What I don't know is how well decoupled the two issues would need to be. I think it would only work if it was a loan not a purchase of shares in the house.

 

Some info on gifting property here..

 

https://www.saga.co.uk/magazine/money/personal-finance/giving/tax-and-gifting-property

 

Its not clear what happens about the CIL exemption if a self builder doesn't own all of the property. I know build to let properties don't qualify so I think it likely your mother will need to own more than say 50% of the new house?  In addition she will need to live in it for at least 3 years to qualify for the CIL exemption for self builders. I would hope the council wouldn't penalise you if she had to move into a nursing home or worse within the three years.

 

 

Edited May 8, 2019 by Temp

[PeterW]

1 hour ago, scottishjohn said:

providing there was a proper rental agreement ,the fact she has not actually paid you month by month and that it is deferred  to be paid on her demise , that should work . and all debts on an estate are paid before any calculation of inheritance tax

 

Not how HMRC see it, as they would tax based on the income in year - and it has to be market rent so in London that could be a 4 figure sum per month which definitely puts the OP into income tax territory 

[newhome]

3 minutes ago, Temp said:

I know build to let properties don't qualify so I think it likely your mother will need to own more than say 50% of the new house?

 

How will they know? The evidence required seems to be a self build mortgage (which she is not getting by the sounds of things), a self build warranty (which could easily be in her name I imagine), or an approved VAT reclaim that could also be in her name. 

[Simplysimon]

if it comes to be that it's gooing to cost 7-10k in fees, i'd be looking to appoint a barrister as opposed to a solicitor. they will be far more knowledgeable about these sort of things

[Temp]

12 minutes ago, newhome said:

 

How will they know? The evidence required seems to be a self build mortgage (which she is not getting by the sounds of things), a self build warranty (which could easily be in her name I imagine), or an approved VAT reclaim that could also be in her name. 

 

Good point. 

[lizzie]

I would say the likelihood is that fee quote includes an opinion and advice from Counsel and that would be usual.

[iSelfBuild]

This chap will help you out and give sound advice - https://www.samhawking.co.uk/

[Tom Smith]

21 hours ago, newhome said:

I’m definitely no expert but my initial thoughts are that your mother will end up owning 1 house in total and another house as a part share with the other share owned by yourself as (presumably) tenants in common. To avoid the ‘gift with reservation’ issue and the fact that you are buying a share in her principle residence why don’t you buy a share in her existing property (it doesn’t need to be 50%) to release enough capital for your mother to build the new dwelling that will be solely owned by her? You will then earn a share of the rental income from the old house as will your mother that should tick both boxes surely? The refurb costs will be shared dependent on the share of the property each of you own. Seems a more straightforward approach to me? 

Super advice....it never occurred to me and makes so much sense, though I would have to analyze how it might impact on future IHT. Presumably the percentage of the existing house in which I would purchase shares would become mine outright and would therefore fall out of my mother's estate. Thank you so much for this neat solution.

Edited May 9, 2019 by Tom Smith

[Ferdinand]

2 hours ago, Tom Smith said:

THIS IS SUPER ADVICE....it never occurred to me and makes so much sense, though I would have to analyze how it might impact on future IHT. Presumably the percentage of the existing house in which I would purchase shares would become mine outright and would therefore fall out of my mother's estate. Thank you so much for this neat solution.

 

There could be a transition issue whilst the new property is being built, and your mum become therefore a beneficiary (ie living in) of a property you partly own in the interim. That may imply a rent being paid for that benefit, or it being taxable on the notional rent.

 

But that is a relatively small factor, or could be perhaps be turned into one.

 

Ferdinand

 

Edited May 9, 2019 by Ferdinand

[newhome]

6 hours ago, Tom Smith said:

Presumably the percentage of the existing house in which I would purchase shares would become mine outright and would therefore fall out of my mother's estate.

 

Yes I imagine that this is how it would work. You would however become liable for capital gains tax on the rental property as would your mother if you were to sell it so if you were to somehow buy your share at a let’s say less than market value price ? the CGT liability would be greater as the increase in the property value would presumably be inflated when / if you sold the property. 

 

Definitely still worth getting proper advice as anything on here is just opinion / suggestions, plus caveat emptor! 

 

 

[ToughButterCup]

14 hours ago, Tom Smith said:

[...]

Would be extremely grateful for your thoughts.

[...]

 

I'm flattered and surprised you ask here.

This discussion board is a little nest of building nerds: nerds, some by qualification but more by experience some of which bitter. 

 

Your challenge strikes me as analogous to those here who need (say)  a Structural Engineer. Many will accept work in which they have a peripheral understanding and will do a -for them- competent job. But their customer is given an unnecessarily complex - for which read expensive - specification. 

I think you might well benefit from a thorough networking exercise - among lawyers. You need a tax nerd - one without an over inflated sense of self-worth.

 

Then, when yer all sorted, come 'n arxk us 'ow ter mix a bit 'o mortar like.

[Tom Smith]

21 hours ago, lizzie said:

 

My mistake too sorry I misread your initial comment but thats the professional you need for a complex scenario such as you describe, the fee reflects the complexity perhaps? No-one is going to give you an absolute guarantee on something like this. Maybe shop around to find someone cheaper but cheap may not be best.

Yes, I think that there's no getting away from the fact that I do need to find an experienced legal person to advise me, but I always like to be in a position of knowledge before doing so, so that I know what they are talking about when I do meet them! Thanks to the members here, I feel that I am gaining many good ideas that I had never thought of.

[Tom Smith]

21 hours ago, Mr Punter said:

I am not sure of your mother's age or state of health, but gaining planning consent and constructing a new house takes years rather than months time and she would be living alongside a building site for a fair while.

 

If you gain consent for the new house she could sell the plot separately without any tax liability and use the money to refurb her current house and perhaps invest in a flat as a buy-to-let.

My Mother will be 76 and she's in a very good state of health - her mother lived until well over 100. Fortunately we already do have planning permission as well as all the architectural plans already drawn. So we are ready to go. I do understand the time it will take for the build itself - and we are working on basis of a year.

 

As for selling the garden plot separately along with the planning permission, apparently that would be seen as "speculative" by HMRC and therefore there may well be a tax liability.

[Tom Smith]

21 hours ago, Ferdinand said:

7.5k seems unnecessarily expensive. If you go to somewhere like Landlordzone or Propertytribes and talk to one of the professionals who advertises or sponsors there with a development specialism it could be a start. Thanks, I will check them out

 

It may be useful to take Estate Planning advice and Business Planning advice as separate elements. Good advice

 

The important thing is to find somebody who has done 20 nearly identical things before, ideally in London. I would probably be looking in eg Guildford or Sutton rather than eg Chelsea for my adviser. Very different rates. Good advice

 

Potential other factors involved

 

2 - I think a good flexible solution could involve creating a property company, probably for the investment property. Property can be injected and extracted at face value without tax implications iirc. Then your mum could gift you shares etc in tranches if necessary, or resign as a director, and you can appoint and unappoint Directors. You could inject the refurb capital, and your mum the property .. or a lifetime gift of half of it etc. Definitely will look into this

3 - Might be worth converting into 2 or 3 flats for resilience of future income. One tenant gone bad can create a 6-9 month dead spot in income. Managing tenants is increasing professionalised, it is easy to come huge croppers for trivial errors, and especially in London Councils are currently riding out like Wild Bill Hiccock on landlord hunts, sometimes with justification. Converting into 3 or so flats, sensible as the idea is, would probably be too costly, since the structural changes would need to be considerable - but thanks again for the suggestion.

6 - One way would be to develop the existing in a company, rent out or sell, and take the money out as income for mum or pension for you at 40k a year or tax free maximum over x years (or read back for 4 years). Or entrepreneur’s relief etc. But for these there are requirements in terms of having added value and done work.

7 - In general do stuff quickly and reach a new stable state .. as it is all changing, and political risk is around at present. Again, very interesting

 

 

 

 

Edited May 9, 2019 by Tom Smith

[Tom Smith]

18 hours ago, PeterW said:

 

Not how HMRC see it, as they would tax based on the income in year - and it has to be market rent so in London that could be a 4 figure sum per month which definitely puts the OP into income tax territory 

 I am guessing that she would only need to pay me half of the market rent, given that I would only own half of the house?

Edited May 9, 2019 by Tom Smith

[Tom Smith]

12 hours ago, Ferdinand said:

 

There could be a transition issue whilst the new property is being built, and your mum become therefore a beneficiary (ie living in) of a property you partly own in the interim. That may imply a rent being paid for that benefit, or it being taxable on the notional rent.

 

But that is a relatively small factor, or could be perhaps be turned into one.

 

Ferdinand

 

If I purchased a share of the existing house, then the issue of gifts with reservation etc wouldn't be an issue actually, since she wouldn't have gifted me anything. I am guessing that she could continue to live in the existing property for a while, whilst waiting to move into the new build, even though I would be part owner of the existing property? Please forgive me, if I misunderstood your point....

Edited May 9, 2019 by Tom Smith

[Tom Smith]

8 hours ago, newhome said:

 

Yes I imagine that this is how it would work. You would however become liable for capital gains tax on the rental property as would your mother if you were to sell it so if you were to somehow buy your share at a let’s say less than market value price ? the CGT liability would be greater as the increase in the property value would presumably be inflated when / if you sold the property. 

 

Definitely still worth getting proper advice as anything on here is just opinion / suggestions, plus caveat emptor! 

 

 

I think the current property (my mother's main residence) would become liable for Capital Gains Tax from the point at which it is no longer considered as her main residence, and I believe I am correct in saying that there is even a grace period of 2 years (?) to make the switch?

Edited May 9, 2019 by Tom Smith