Gifting a family home? Don’t forget the taxman and council

Over half of under-35s need help from parents to get on the housing ladder. But what happens when the “bank of Mum and Dad” runs out of cash, just when their car packs up and the roof needs replacing?

Jan and Derek, Observer readers in their 60s and “in a hole financially”, face that predicament. They need cash and wonder if they can sell their unmortgaged, terraced house to their son, at a reduced or nominal price, or if they or he should take out equity release to refloat their finances.

Websites stress how selling your home for £1, or at any discount, is perfectly legal but is regarded, for tax purposes, as a “gift”. But that only matters if you are in the inheritance tax net, with a home and other assets worth £500,000, or £1m for a married couple. And as it’s our couple’s main home they won’t have to pay 28% capital gains tax on any rise in value (of the part they’re selling) since they bought it.

But things can be more complex. One in 10 over-55s still has a mortgage, which would need to be repaid before any gifting, while selling at fair value would trigger buyer stamp duty above £250,000.

Jan and Derek’s son already has a mortgage, so he would have to be cleared by his lender for new borrowing. If his parents decided to help out by paying rent to continue living in their home, this would attract the taxman – and landlords face a 2% income tax increase from April 2027. In many areas, a family buyer would now be hit with double council tax as a second home owner.

While 40% inheritance tax might not be an issue in an ownership swap, the cost of future care might be. Local authorities would probably treat a couple’s home as still theirs in any future assessment of ability to pay. And though a family deal will cut out the estate agent, even the simplest property transfer must jump through all the home-buying legal hoops and be conveyanced in the usual way.

As for equity release, that’s for over-55s only. A debt-free couple in a £300,000 house could be offered £90,000 in a “lifetime mortgage”. Interest rolls up at around 7%, you may be able to repay up to 10% a year, and the loan is only repaid when the last applicant dies. Half of all borrowers choose drawdown plans, rather than lump sums. But borrower beware: it chips away at what you will leave, because your debt roughly doubles every 12 years.

Complex financial decisions, of course, need fully independent advice, especially involving equity release.

Photograph by Karl Hendon / Getty Images