Buying your parents’ home can be both a practical and emotional decision. Whether you are looking to move up the property ladder, support your parents or simply keep a cherished home within the family, it can seem like a straightforward solution. However, depending on how the transaction is structured, there can be significant legal, tax, financial and practical implications, spanning everything from inheritance tax to your parents’ future care fee assessments.
Whilst buying your parents’ home may be the right option, it is important to carefully consider how the transaction could affect all parties before proceeding. In this article, we explain how the process works and outline the key legal considerations.
Buying your parents’ house at market value
Buying your parents’ house at market value is the most straightforward option. From a legal perspective, it is no different from buying a property from a seller you do not know and avoids the tax complications that can arise when a property is sold below market value.
However, stamp duty land tax (SDLT) may still apply, and higher rates may be payable if the property will be a second home or investment.
Buying your parents’ house at market value can be a good option if you simply want to keep the property within the family.
Can you buy your parents’ house under market value?
If you are wondering whether buying your parents’ house below market value could be a more efficient way to transfer assets, you are not the first. Paying your parents a nominal amount, such as £1, for their home can seem like a straightforward solution to many estate planning challenges. However, whilst you can buy your parents’ house below market value, it is more complicated than many people realise, and there are significant legal, financial and tax implications you need to be aware of first.
For inheritance tax (IHT), the difference between the sale price and the market value may be treated as a gift. This is known as a potentially exempt transfer (PET), meaning no immediate IHT charge arises, but the value of the gift may be included in your parents’ estate if they die within seven years of making it.
The gift will use all or part of the available nil-rate band before the rest of the estate is assessed for IHT. If death occurs between three and seven years after the gift, taper relief may reduce the amount of tax payable on the gift itself, but only where the cumulative value of gifts exceeds the available nil-rate band. Taper relief reduces the tax due on the gift, not the value of the gift itself.
If your parents continue to live in the property without paying full market rent, the gift with reservation of benefit (GROB) rules may also apply, potentially bringing the property back into their estate for IHT purposes. Pre-owned asset tax (POAT) and stamp duty land tax (SDLT) may also need to be considered.
Capital gains tax (CGT) may also be relevant. If the property is your parents’ main residence, the sale may qualify for principal private residence relief, meaning no CGT would arise. However, if the property is not their main residence – for example, a holiday home or buy-to-let property – HMRC will usually treat the transaction as taking place at market value for CGT purposes.
Buying your parents’ house under market value can be a good option if your parents want to support you financially, for example by helping you onto the property ladder or enabling you to move to a larger home. However, because the discount may be treated as a gift, it is important to take legal and tax advice before proceeding.
Can you buy your parents’ house to avoid inheritance tax?
Buying your parents’ house to avoid inheritance tax (IHT) is a complex matter. If your parents sell the property to you at market value and no longer have any interest in it – they no longer live there or receive any ongoing financial benefit from it, such as rental income – the property will generally not form part of their estate for IHT purposes.
However, if they sell it to you under market value or continue to live in the property without paying full market rent, the gift with reservation of benefit (GROB) rules may apply and the property could still be treated as part of their estate.
To reduce this risk, your parents would need to pay full market rent if they continue living there, and you should ensure the arrangement complies with the relevant tax rules.
Can you buy half your parents’ house?
Yes, you can buy half of your parents’ house, but this can also have tax and practical implications.
If your parents continue living in the property after selling you a share, the gift with reservation of benefit (GROB) rules may apply unless the arrangement is structured correctly. For example, this may be avoided if your parents pay full market rent for their continued occupation.
However, different rules may apply if you and your parents live in the property together and share household expenses fairly. In this situation, the arrangement may avoid being classified as a gift with reservation of benefit.
Before buying a share of your parents’ house, it is important to consider how the property will be owned, who will live there, how costs will be shared, what should happen if one party later wants to sell and whether you could afford to keep the property if your parents die and their share passes under their will or estate.
Can you buy your parents’ house to avoid care home fees?
Alongside the legal, financial and tax implications involved in buying your parents’ house under market value, local authorities may investigate property transfers if they believe assets have been deliberately reduced to avoid paying care home fees. This is known as deprivation of assets.
Even if ownership changes hands, the local authority may still take the value of the property into account when assessing your parents’ ability to pay for care.
If you would like to learn more about deprivation of assets and how local authorities assess care fees, read our article on whether a lifetime property trust can help avoid care home fees.
Do I need a solicitor to buy my parents’ house?
Buying your parents’ house can be a sensible option in the right circumstances, but it is important to understand the legal, tax and practical implications before proceeding. What appears to be a straightforward family arrangement can quickly become more complex, particularly where inheritance tax, care fees, stamp duty land tax, capital gains tax or ongoing occupation of the property need to be considered. Seeking expert legal advice before proceeding with the transaction can help you avoid potentially costly mistakes.
Combining extensive estate planning and property law expertise, Scott Bailey can help you understand your options and structure the transaction correctly. Whether you are buying your parents’ home at market value, purchasing it under market value or considering a wider estate planning arrangement, our experienced solicitors can provide clear, practical advice tailored to your family’s circumstances.
If you are considering buying your parents’ house and would like to understand the best way forward, please get in touch.
