Sell a house to a friend?

Magic Pips

I'd like to get some feedback on the below, bear with me if i fail to explain anything clearly...

Is it possible to sell a property worth 700k to a friend, and NOT have them take out a mortgage - but instead have a legal arrangement to pay X amount each month (in line with interest rates) over a term. Also state what would happen if payments were missed, the house was sold etc.

How/when would the deeds change over, of course mortgage relief wouldn't be available - cos there'd be no mortgage!

I'm just thinking out loud here more so hoping for some more knowledgable insight, or possible flaws in the process?

Mr. Incognito

hmmmmm tough one.

Have you thought about the income tax consequences of this? You'd be liable to pay income tax, probably at the top rate (41%) on the installments as opposed to the CGT charge on a disposal of 20%

Plus 700K is a lot of money. One would think people are more fortright in paying the banks who will forclose on your ass than paying a mate back. i.e what happens if they miss a few payments and it becomes a habit over time.
You do not have the legal arsenal the banks have at your disposal. Plus your contract would have to include contingencies like death etc.

I cannot see any benefit in such an idea tbh.

Magic Pips

Thanks for the feedback.

pigeonbutler

SetantaL wrote: »

hmmmmm tough one.

Have you thought about the income tax consequences of this? You'd be liable to pay income tax, probably at the top rate (41%) on the installments as opposed to the CGT charge on a disposal of 20%

Plus 700K is a lot of money. One would think people are more fortright in paying the banks who will forclose on your ass than paying a mate back. i.e what happens if they miss a few payments and it becomes a habit over time.
You do not have the legal arsenal the banks have at your disposal. Plus your contract would have to include contingencies like death etc.

I cannot see any benefit in such an idea tbh.

If the legal agreement was to the effect that the sale happened immediately and that the seller had lent the buyer the 700k, to be repaid over time, in that case there would be the initial CGT charge on disposal (20% of the gain, not the price) and income tax would only be payable on the interest portion of the repayments. I.e. repayments of principal would not be liable to income tax.

But that's only the tax position. I wouldn't advise that arrangement due to the difficulty of enforcing the debt in the event of default. Unless there's some good reason why you feel the need to structure the deal in such a way?

Magic Pips

pigeonbutler wrote: »

I wouldn't advise that arrangement due to the difficulty of enforcing the debt in the event of default. Unless there's some good reason why you feel the need to structure the deal in such a way?

Well, my best friend (trainee accountant mortgage quoted at 350k) is looking at buying a house over the next year, where as my family home is on the market for 700k - which i know he'd like to buy. I haven't talked about it with him or anyone else for that matter. I just thought i'd bounce the idea around in my head before actually suggesting it as a possibility.

pigeonbutler

Magic Pips wrote: »

Well, my best friend (trainee accountant mortgage quoted at 350k) is looking at buying a house over the next year, where as my family home is on the market for 700k - which i know he'd like to buy. I haven't talked about it with him or anyone else for that matter. I just thought i'd bounce the idea around in my head before actually suggesting it as a possibility.

I'd just think of it this way: The bank limit the amount they'll lend people for good reason, they don't want someone's repayments to be beyond their ability to repay.

€700k at 4.5% means interest accruing at €31,500 per year. I'm a trainee acc myself so I know there's no way he can even keep up with the interest payments at that rate! Even when he's qualified he'd be looking at forking out close to 50% of his GROSS salary (so probably about 60-65% of his take home pay) without ever putting a dent in the principal outstanding.

I know you're probably thinking you'd be doing your mate a favour by facilitating this, but if he's not able to make the repayments where are you gonna stand? It takes the banks up to 2 years to reposess a house through the courts. And that's with their watertight loan agreements and armies of lawyers!

Magic Pips

I do get the risks, but they way the market is - this could be a financially better deal for the family coffers also.

I'm not seriously thinking about it as there's financial risks and also risks to friendships etc etc...

Although i appreciate the bounce back opinions!

K_P

I'd have to agree with other posters here. It's too fraught with dangers - defaulting on payments, ruined friendships, dodgy legal situation. Very decent of you to think of your friend but leave the lending to the banks.

Magic Pips

K_P wrote: »

I'd have to agree with other posters here. It's too fraught with dangers - defaulting on payments, ruined friendships, dodgy legal situation. Very decent of you to think of your friend but leave the lending to the banks.

I think you're right, thanks. I'll leave this idea in the "What if" area of my brain! :rolleyes:

Victor

Essentially, you would play bank and you would hold the a mortgage on the deeds. It sounds risky and anyway, your friend can't afford it at the moment.