What are the tax implications of buying a house off my father at below market value?
Are we allowed to do this and would there be any tax implications? For example, would stamp duty be based on what I pay my father, or what the house is actually worth?"
"It is perfectly acceptable for your father to sell this house to you in the way you suggest. However, you should keep good records. As your father sold assets worth more than £44,000, then he should report the sale to HMRC by completing a self-assessment tax return even if he didn’t suffer a capital gain.
If there is a capital gain on the house, it will be calculated on its market value at the date of transfer to you and not at the amount you paid for it less the probate value.This is because it comes under the rules of sale for connected parties and was inherited from a death estate.
You will also need to consider inheritance tax (IHT). Gifts from one person to are treated as ‘potentially exempt transfers’. This means the gift only becomes totally free of IHT if the giver lives for seven years. If the giver dies before then, however, you may be eligible for a reduction in IHT depending on when death occurs.
In your case because the transfer of the house to you is to pay off a debt, then the money used to pay off the debt will not be subject to the rules of IHT; the rest will be.
The sale of the house is subject to stamp duty land tax. Because you paid less than £125,000, there is no amount to pay. However, you will still be required to report this to HMRC.
As your father inherited the house, you could also consider changing the way you take ownership. Provided you haven’t paid your contribution to your father for the house, there is likely to be scope to rewrite the will by means of a deed of variation and redirect a share in the house to you. The will must be rewritten within two years of the date of death, all beneficiaries must agree and it must show compliance with section 142 of the Inheritance Tax Act 1984.
This would avoid a potentially exempt transfer and therefore the possibility of paying IHT, as the house will have been passed to you directly from the will and your father will not have been deemed to have made a transfer to you. Then there would be no need for your father to notify HMRC of the sale of the house to you."
David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The process of applying for the right to deal with a deceased person’s estate. If a person has left a will, they will usually have appointed a will executor. The executor then has to apply for a ‘grant of probate’ from the probate registry, which is a legal document that confirms the executor has the authority to deal with the affairs of the deceased. If a person dies without making a will, intestacy law applies (see intestate).
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.