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Splitting an occupied inheritance property

including wills and probate
woodles
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Splitting an occupied inheritance property

#166734

Postby woodles » September 16th, 2018, 4:44 pm

Apologies if this isn't the right board on which to post this question.

My mother-in-law died last year leaving her house to her four sons. One of the sons, Ian, is currently living in the house and would like to continue to live there. However he doesn't have the money to buy out his brothers and is too old to get a mortgage.

Of the other three brothers, two are not financially well off and would like to receive their share of the inheritance as soon as possible.

The fourth brother is my husband and we could help out. One possible solution is that Ian retains his 25% share in the house, my husband keeps his 25% and we also buy the 50% share owned by his two other brothers. Ian would therefore own 25% of the house and me and my husband would own 75%. We'd probably need to take out a mortgage to cover some of it.

Ian still works and would like to eventually own the house (or at least own a higher percentage of the house) so we'd like to set up an agreement that would enable him to buy our share of the house over time.

I'd appreciate any feedback on this, e.g. are there any problems/pifalls with shared ownership, would it be difficult and/or expensive to set this up legally, and can anybody think of a better solution?

Thanks in advance for any advice.

Charlottesquare
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Re: Splitting an occupied inheritance property

#166784

Postby Charlottesquare » September 16th, 2018, 8:17 pm

Future capital gains on incremental sales from you and your husband need considered, depending on quantum of piecemeal sales these could come in to charge, also might there be SDLT additional costs for you if you say wanted to move from your own house given your interest in this additional house.
Also considerations if you/your husband were both to die etc.

I think any agreement will need a solicitor but I would also involve an accountant re potential tax issues (or get that rare species, a solicitor who really understands tax)

Lootman
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Re: Splitting an occupied inheritance property

#166798

Postby Lootman » September 16th, 2018, 9:12 pm

You could achieve the same result without actually holding title to the property yourself which, in my view, would be preferable.

And that would be to issue a mortgage to Ian for 75% of the property value. That money would be used by Ian to buy out the other three siblings. He would then be the sole owner of the property but would have a mortgage, issued by you, for 75% of it. He would then make monthly payments to you to repay that loan over whatever period and at whatever interest rate makes sense.

The only snag would be if he fails to make the payments, as you then would have to repossess the property. You have to be willing to do that. You'd effectively have a charge or lien on the property so that if he ever sold the place or remortgaged it, then you'd be paid off from the proceeds.

As long as you can find the initial outlay, and are happy to wait for payment, then this should be no more difficult to set up than any other mortgage, i.e. any half decent solicitor ought to be able to set it up for you.

Clitheroekid
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Re: Splitting an occupied inheritance property

#166813

Postby Clitheroekid » September 17th, 2018, 12:13 am

As Lootman says, probably the best solution would be to lend Ian the money to buy the house and secure it with a legal charge against the title.

A significant advantage of this is that any capital gain on the sale of the property would be exempt, as it would be Ian's principal residence. If you actually owned a 75% share that part of the sale proceeds would be subject to CGT, and there would also be potential arguments about who should pay for repairs, improvements, insurance and so on, not to mention problems about when to sell and how much to sell for.

Bear in mind that if you enter into a conventional loan with interest to be charged the interest is taxable income.

Depending on your and Ian's financial circumstances you might consider taking a charge that would secure 75% of the value of the property rather than the amount of the original loan. That way you could benefit from any capital gain, which might enable you to waive any interest charge. Although you would obviously then be subject to CGT it's generally better to pay CGT rather than income tax, if only because of the fairly generous exemptions.

If you did choose that option there would have to be a mechanism for valuing the house at the relevant times - perhaps annually - as the effect of any repayments would be to gradually reduce your share of the equity. The mechanism would probably give you the opportunity to agree the value, but in the event of disagreement have it determined by an independent valuer.

There would probably also have to be an agreement that in the event of the value falling (and who knows, Mr Cairney could be right for once in his life!) you would receive at least the original loan back.

There would obviously be more risk in this option, but it could produce a better outcome for both of you in certain circumstances.

woodles
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Re: Splitting an occupied inheritance property

#166853

Postby woodles » September 17th, 2018, 10:06 am

Thanks Charlottesquare, I hadn't really considered the tax implication so I'll definitely attempt to engage a solicitor who understands tax

Lootman Clitheroekid Thanks for the suggestion of issuing a mortgage, this had occurred to me but I'd assumed it would be a really complicated and fraught process, from what you say it should be fairly straightforward. Potentially having to repossess is a worry as he doesn't have a great financial track record but I think it's a better solution than that proposed by Ian, which is for him to get a mortgage with my husband and me acting as guarantors.

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Re: Splitting an occupied inheritance property

#166860

Postby ouzo » September 17th, 2018, 10:19 am

Can Ian actually afford to live there? I ask as my brother may be in a similar situation in due course, and as he's unemployed and unwilling to have a lodger he'd struggle to pay the bills, let alone any mortgage/rent (but does acknowledge this and is planning on moving to Wales!).

woodles
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Re: Splitting an occupied inheritance property

#166863

Postby woodles » September 17th, 2018, 10:27 am

Hi Ouzo - good question, Ian is nearly 67 and determined to carry on working and I have no doubt that he fully intends to pay back all debt he owes. Whether he is physically or mentally up to this is debatable.

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Re: Splitting an occupied inheritance property

#166868

Postby Alaric » September 17th, 2018, 10:33 am

woodles wrote:Ian is nearly 67


There may be another option whereby you buy his share of the inheritance as well as the other two brothers in exchange for a lifetime tenancy. You own the whole house, so CGT comes into consideration.

woodles
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Re: Splitting an occupied inheritance property

#167035

Postby woodles » September 17th, 2018, 10:17 pm

We’ve been discussing these options, Ian has now suggested a ‘dependent relative’ mortgage. I’d never heard of this before but it sounds something like a buy to let except that most buy to let mortgages don’t allow relatives to occupy the property.

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Re: Splitting an occupied inheritance property

#167088

Postby woodles » September 18th, 2018, 8:28 am

Ian is proposing is that we (my husband and myself) arrange a 25 year interest-only dependents mortgage on 75% of the property value, Ian will cover the mortgage payments and also make adhoc payments against the capital whenever he can with the aim of paying off the mortgage in full by the end of the term.
This seems to me like kicking the problem down the road, if Ian can't pay off the mortgage by the end of the term he'd either have to leave his home at the age of 91 (they're a long-lived family) so we could sell the house to pay off the mortgage, or my husband and I would have to pay the outstanding balance out of our savings. Given that we'll be in our late 70's and early 80' by then we might need that money to cover things like care costs.

scrumpyjack
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Re: Splitting an occupied inheritance property

#167093

Postby scrumpyjack » September 18th, 2018, 8:45 am

Also your money will be eaten away by 25 years inflation so what would buy 75% of a house now will buy a can of beans in 25 years time.

Meanwhile you'll pay income tax on the interest

Effectively you will be making a very large gift but perhaps that is your intention anyway?

Alaric
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Re: Splitting an occupied inheritance property

#167099

Postby Alaric » September 18th, 2018, 9:02 am

scrumpyjack wrote:Also your money will be eaten away by 25 years inflation so what would buy 75% of a house now will buy a can of beans in 25 years time.


I think this is a suggestion where a third party provides the financing presumably with the poster and her husband guaranteeing the mortgage in some manner. This immediately pays off the other three brothers, but as suggested doesn't resolve the issue of what happens if the guarantee has to be invoked. You also need to establish who gets what if Ian doesn't survive 25 years or needs to realise the value in the house for care costs.

Mike88
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Re: Splitting an occupied inheritance property

#167109

Postby Mike88 » September 18th, 2018, 9:27 am

The entire arrangement is fraught with difficulties. Effectively you will be tying up your money for a very long time with the ability of Ian's contributions possibly diminishing when he ceases to work. If you want to move in the future you will be subjected to additional stamp duty costs and tax on the income generated. At the age of 67 he won't be working for very much longer and you may not have taken into consideration that, at his age, illness can strike at any time! Has Ian any sort of pension because it is doubtful that he will be able to fund a 75% mortgage without one?

As long as you , Ian and your brother are aware of the generosity of your offers and are prepared to accept the risks and consequences then so be it. If for any reason you find yourself in a position when you are unable to help Ian the you will very quickly become the bad guy. Had any of the consequences been discussed beforehand with the now deceased? The arrangement made in the Will is most unsatisfactory leaving a situation which it seems has fallen on you to resolve.

woodles
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Re: Splitting an occupied inheritance property

#167147

Postby woodles » September 18th, 2018, 12:18 pm

scrumpyjack Alaric Mike88 Thanks for taking the time to respond, it's much appreciated

As Mike88 says, it's a difficult situation.

Ian used to have a house of his own but remortgaged (on an interest-only basis) to finance ill-fated business ventures. When the mortgage term ended he couldn't pay what was still owed and couldn't get another mortgage, so ended up selling his house to and going to live in his mother's house. At the time his mother was in a nursing home with dementia and she was never aware of the situation he'd got himself into.

Clitheroekid
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Re: Splitting an occupied inheritance property

#167152

Postby Clitheroekid » September 18th, 2018, 12:25 pm

It seems to me that by far the best solution would be just to sell the house and split the proceeds. Taking out what would be a substantial mortgage at the age of 67 with anyone, be it a commercial lender or a friend / relative, is inherently stupid. There may be occasions where it's justified, but this isn't one of them.

It's quite clear that Ian really can't afford to live there, and whilst entering into an elaborate arrangement to help him achieve his wishes may seem generous it seems highly probable that everyone involved will come to regret it.

You haven't said what sort of sums are involved, but Ian could then use his share as a deposit to buy a smaller house, possibly with a much smaller and more affordable mortgage, or he might even just decide to rent.

Perhaps it would be a good idea to leave a couple of copies of "Canal Boat" or "Waterways World" lying around where Ian's likely to see them! ;)

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Re: Splitting an occupied inheritance property

#167159

Postby Dod101 » September 18th, 2018, 12:32 pm

The various difficulties in the arrangement have been outlined. In the first post the OP says that Ian 'would like to continue living there'. Maybe he needs to accept that that is not going to be possible except by you and your husband literally mortgaging your futures for the benefit of Ian. If you are prepared to do that fine, but what if you said to Ian that it is time that he faced the facts of life and that he was not going to be able to continue living there?

Presumably he is not a tenant in the legal sense and that he would leave once he understood the position. If he stays on he would need to maintain the place, pay council tax and so on which will put you down the line for rent, or mortgage repayments. I think I would say, no we need a clean break and sell the property and then fulfil the terms of the Will by paying out to all four brothers. That will focus the mind of Ian of the facts of life. What may seem a nice helpful friendly gesture at the time will probably seem much less so as time goes by and you and husband are left with the financial burden. That will not help your relations with Ian.

Just my pennyworth.

Dod

PS CK has just beaten me to it but I will leave my post anyway.

didds
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Re: Splitting an occupied inheritance property

#167221

Postby didds » September 18th, 2018, 2:27 pm

I thought I'd replied at length but it doesn't appear to have made it here. oh well - I basically said what CK and Dod did.

Ultimately I can just see it being far easier in the long term to sell, divvy up the cash, and Ian make his own choices and solutions in life.

good luck whatever you decide.

didds

woodles
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Re: Splitting an occupied inheritance property

#167375

Postby woodles » September 19th, 2018, 8:25 am

Thanks, Clitheroekid, Dod101, didds, you may be right and ultimately we'll just have to tell Ian to move out.

One thing I didn't mention, to avoid too much detail, is that Ian has a wife who is in poor health. She's had a lot of worry and upheaval in the last few years, with having to move out of her and Ian's house and into Ian's Mum's house, so I want to explore every possibility before telling her she'll have to move again.

On the face of it Ian's suggestion that my husband and I take on a dependents mortgage, with Ian paying us enough to cover the repayments, seemed like a good solution. It is an interest only mortgage so the repayments would be relatively low (assuming interest rates remain low), certainly lower than renting an equivalent property, and Ian should be able to afford them, even when he retires. However, when I consider all the possible scenarios (repossession, insolvency, illness, death, interest-rate rises, house price crash, Ian's offspring taking up residence etc) the less attractive it appears. The main issue of course is that being interest-only, unless Ian can make some payments against the capital, there'll be a big debt at the end of the term that will need to be repaid somehow, and I don't want to spend the next 25 years worrying about it.

I appreciate all the advice given, my next step to arrange a session with someone who can give me some legal advice about Ian's proposition, I expect them to warn me against it but they might be able to suggest alternatives.


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