House Purchase - No Mortgage but monthly payment to relative

Outkast_IRE

Hi All,

I am currently saving hard for a house with the intention of purchasing in the new year.
However a family member who intends on spending 6 months of the year for the rest of their lives in Spain has broached a different proposal to me.

He would be willing to sign over the house to me and my partner, on written agreement of giving him for example a monthly payment of €1000 , for 200 months. This would allow him to reach retirement age and provide a regular income to him.

This would result in payments roughly 20-30% less than a mortgage and would be complete in approx. 16 -17 years. It would be a written agreement done through a solicitor so all above board etc.

I am just trying to think of the downsides ? Are there tax implications etc that we should be aware of ?

Peregrinus

The immediate question that leaps to mind is, are they going to transfer the house to you at the start of this period, or at the end?

If at the start, how can they be sure that you will make the payments? What is their recourse if you won't? (Or can't?)

If at the end, how can you be sure that they will transfer the house after you have made the payments? What happens if they die unexpectedly? Or get into financial trouble, and the house is claimed by creditors?

Whatever way you work this, and no matter how much you trust one another, you're going to have to put some mechanism in place to protect all parties against any of the hazards and unforeseen events that might develop in the next sixteen or seventeen years. The legal costs of this will be much greater than with a regular conveyance.

What happens if there is a bout of inflation some time in the next 16 or 17 years, and 1000/month is not enough for them to live on? (Note that with even modest inflation the real value of 1000 euro will decline signifantly over that period.) What happens if things don't work out in Spain and they want to come home? What happens if they die in that time, and the heirs don't want to wait for the balance of the 16 or 17 years - they want the reset of the cash now?

During the six months a year that they're not living in Spain, do they expect to live with you? Do you expect that? If yes, on what terms? Is that arrangement likely to suit both of you for the next 16 or 17 years? At the end of that time, do they move out? Have you lived with them up to now? Do you know what it's like to live with them? Or they with you?

You both need to instruct lawyers - different lawyers. One risk here is that if this deal is less advantageous to them than selling in the open market in the usual way, someone at some point will allege, or suggest, that there was undue influence at work on them. So it's very important to document that they were independently advised, that they fully understood this unusual transaction, etc, etc.

CruelCoin

One downside is the issue of inflation.

Over 16-17 years that €1000 could be worth substantially less to him that it is now.

This would need to be reflected in the agreement you sign up, or there will be bad blood....

Edit: Ack, he beat me to it.

Outkast_IRE

Peregrinus wrote: »

The immediate question that leaps to mind is, are they going to transfer the house to you at the start of this period, or at the end?

If at the start, how can they be sure that you will make the payments? What is their recourse if you won't? (Or can't?)

If at the end, how can you be sure that they will transfer the house after you have made the payments? What happens if they die unexpectedly? Or get into financial trouble, and the house is claimed by creditors?

Whatever way you work this, and no matter how much you trust one another, you're going to have to put some mechanism in place to protect all parties against any of the hazards and unforeseen events that might develop in the next sixteen or seventeen years. The legal costs of this will be much greater than with a regular conveyance.

What happens if there is a bout of inflation some time in the next 16 or 17 years, and 1000/month is not enough for them to live on? (Note that with even modest inflation the real value of 1000 euro will decline signifantly over that period.) What happens if things don't work out in Spain and they want to come home? What happens if they die in that time, and the heirs don't want to wait for the balance of the 16 or 17 years - they want the reset of the cash now?

During the six months a year that they're not living in Spain, do they expect to live with you? Do you expect that? If yes, on what terms? Is that arrangement likely to suit both of you for the next 16 or 17 years? At the end of that time, do they move out? Have you lived with them up to now? Do you know what it's like to live with them? Or they with you?

You both need to instruct lawyers - different lawyers. One risk here is that if this deal is less advantageous to them than selling in the open market in the usual way, someone at some point will allege, or suggest, that there was undue influence at work on them. So it's very important to document that they were independently advised, that they fully understood this unusual transaction, etc, etc.

1. Transfer would be at the start of the period.

2. The topic of missed payments and inability to make payments will certainly need to be discussed further, just in case anything bad was to happen.

3. Same answer as No.1

4. Agreed the legal cost at the outset may be larger, but the saving for both parties will probably negate it as there will be no % taken by auctioneer etc.

5. Relative is my father, and my partner and I are quite happy to have him live with us for long periods as we have both lived with him for a while now. No issues.

6. Excellent point about instructing different solicitors etc.

The point about inflation is a very valid one, and will certainly be a consideration before signing up to any agreement.

JimsAlterEgo

probably CGT as will be a gift

Mrs OBumble

You both need independent professional tax advice too. (Don't rely on lawyers to advise about tax. They may try, but they may not get it right.)

Depending on the value of the house, there may well be gift tax issues. And potentially a capital gains tax issue for your father depending on the value at transfer date vs what it was when he purchased.

It's likely that the most tax-efficient way to structure this will be different to the simplest legal way to structure it.

Also - do you have any siblings, or a mother? Anyone else whose nose could be put out of joint by this, and who could cause problems for you when your father dies (especially if he dies sooner rather than later)?

The_Conductor

JimsAlterEgo wrote: »

probably CGT as will be a gift

Doesn't apply if the OP is living in the property for a period of at least 3 years before the transfer occurs (or could be accounted for in the lifetime limit of asset transfers as the 'seller' is the OP's father).

OP- along with separate solicitors- a couple of hundred quid on a tax consultant would be money well spent.

4ensic15

It could be done by way of a contract for sale and an unpaid vendors lien. It would effectively be a private mortgage. It could be structured as the sale of the house for x amount with y% interest on the outstanding balance. This could be calculated so as to achieve a figure of 1000 per month for 200 months. I have in fact just done a quick calculation. A sale price of €149,587.5 at an interest rate of 3.5 % would give rise to 200 payments of 1,000 to clear. There would be a gift of the difference between 149,587 and tyhe value of the house.

newacc2015

The_Conductor wrote: »

Doesn't apply if the OP is living in the property for a period of at least 3 years before the transfer occurs (or could be accounted for in the lifetime limit of asset transfers as the 'seller' is the OP's father).

OP- along with separate solicitors- a couple of hundred quid on a tax consultant would be money well spent.

This tax avoidance scheme is being investigated by Revenue (it was in the Irish Times recently). Revenue believe it is currently being exploited. There is a good chance this scheme wont exist in the 200 months as it was only introduced in 2000

I personally cant see why Revenue want to investigate this scheme while at the scheme time vulture funds are using charities to sell properties CGT free, which I imagine is multiples of the tax being avoid by single individuals/ I suppose they like low hanging fruit

Arcade_Tryer

newacc2015 wrote: »

This tax avoidance scheme is being investigated by Revenue (it was in the Irish Times recently). Revenue believe it is currently being exploited. There is a good chance this scheme wont exist in the 200 months as it was only introduced in 2000

I personally cant see why Revenue want to investigate this scheme while at the scheme time vulture funds are using charities to sell properties CGT free, which I imagine is multiples of the tax being avoid by single individuals/ I suppose they like low hanging fruit

Tax avoidance only works if you're wealthy.

I really dislike the idea of that rule being deemed tax avoidance.

Mrs OBumble

Tax avoidance is anything which you do to organise your affairs to minimise your tax liability.

There is nothing wrong with tax avoidance. Unlike tax evasion (which is doing illegal / underhand stuff to avoid paying tax.

With any approach that is applied over a number of years, there is always a risk that the government will change the rules next month / year / five years, and so your arrangement won't be as advantageous after all. None of us can really predict how this will work out.

Marcusm

Arcade_Tryer wrote: »

Tax avoidance only works if you're wealthy.

I really dislike the idea of that rule being deemed tax avoidance.

Even if the house, for example, was worth€10m and not of interest to the child except as a means of passing on some of the family wealth?

4ensic15

Marcusm wrote: »

Even if the house, for example, was worth€10m and not of interest to the child except as a means of passing on some of the family wealth?

The original idea is that someone wouldn't have to sell the home they had been living in to pay the inheritance tax. Many people had to sell the house they had lived in for decades. It was intended as a humanitarian measure not to facilitate passing on family wealth. Now that people have started to organise their affairs in order to take advantage of it the Revenue are now reviewing it. Some people have sold houses they own, moved in with an aged relative and inherited a substantial house tax free and then bought an investment property from the proceeds of the sale of the first house.

Marcusm

Marcusm wrote: »

Even if the house, for example, was worth€10m and not of interest to the child except as a means of passing on some of the family wealth?

The families wealth should be the families wealth to pass on and do as they please not a pot of money for revenue to get their dirty paws on. Inheritance tax is an abomination.

L1011

My parents bought a house in the early 1970s on this basis. The person (former colleague of my grandfather) they were buying it off died and the payments continued to his estate / inheritor who attempted strongarming "inflation adjustments" from them - and inflation in the late 70s early 80s was extremely high. Luckily, they had obtained legal advice and the contract was watertight.

No matter how much you may assume its OK to use one solicitor/tax adviser on this, disputes can still arise and two sets of eyes / two opinions is always worthwhile in the first place.

Mrs OBumble

Tucker Fluffy Reforestation wrote: »

The families wealth should be the families wealth to pass on and do as they please not a pot of money for revenue to get their dirty paws on. Inheritance tax is an abomination.

How many families would you include in this little collective utopia?

Mrs OBumble

Mrs OBumble wrote: »

How many families would you include in this little collective utopia?

All families, certainly between parents and their children or children and their parents there should be absolutely no interference whatsoever nor any tax on any sums of money or property being transferred regardless of how much. That money should be the families to do with as they please, they worked hard to earn it and it should benefit people in their family and give the next generation a better life not benefit the governments coffers.

Inheritance tax should be abolished its taxing money that has been taxed many many times before. Its disgusting. Yes there are exemptions but they are far too small.

Mrs OBumble

Ahh, nox, my little snark about your disguising avoidance of apostrophes clearly went right over your head :-)

BoatMad

Tucker Fluffy Reforestation wrote: »

The families wealth should be the families wealth to pass on and do as they please not a pot of money for revenue to get their dirty paws on. Inheritance tax is an abomination.

my income is mine too and income tax is an abomination

VAT is an abomination and why should I pay capital gains on an asset


PS: Answer

its a tax system

Arcade_Tryer

Marcusm wrote: »

Even if the house, for example, was worth€10m and not of interest to the child except as a means of passing on some of the family wealth?

If the child permanently resides in the dwelling (and has done for a few years) then yes.

Tucker Fluffy Reforestation wrote: »

The families wealth should be the families wealth to pass on and do as they please not a pot of money for revenue to get their dirty paws on. Inheritance tax is an abomination.

Obnoxious reasoning from an otherwise sensible poster.

hanna200

Outkast_IRE wrote: »

...

OP: regarding inflation, I would add a clause into the contract that let's say after 3 - 5 years the amount of €1,000 which you are paying for the years 0 -3 or years 0 to 5 is going to be €1,000 + average annual inflation per Irish Central Bank.

or

Another way is to do similarly as above, yet i.e. after 5 years you are to pay €1,000 + 10% + inflation or whatever you work out with tax advisor.

I have done it in the past with different contract and it works out well.

relax carry on

Tucker Fluffy Reforestation wrote: »

All families, certainly between parents and their children or children and their parents there should be absolutely no interference whatsoever nor any tax on any sums of money or property being transferred regardless of how much. That money should be the families to do with as they please, they worked hard to earn it and it should benefit people in their family and give the next generation a better life not benefit the governments coffers.

Inheritance tax should be abolished its taxing money that has been taxed many many times before. Its disgusting. Yes there are exemptions but they are far too small.

Society, terms and conditions apply. Taxation is one of the terms and conditions as it's used to fund the state you happen to live in. Taxation in the form of Capital Acquisitions Tax and Capital Gains Tax contributes to the running of the state. If you feel strongly enough about the taxation of familial transactions, may I suggest you put your concerns in writing to all your local politicians along with your recommendations on how to plug the gap in the state finances your changes would leave. Keep the pressure on and even if they don't change the taxation system, they should at the very least be able to explain to you why they won't change it.

4ensic15

hanna200 wrote: »

OP: regarding inflation, I would add a clause into the contract that let's say after 3 - 5 years the amount of €1,000 which you are paying for the years 0 -3 or years 0 to 5 is going to be €1,000 + average annual inflation per Irish Central Bank.

or

Another way is to do similarly as above, yet i.e. after 5 years you are to pay €1,000 + 10% + inflation or whatever you work out with tax advisor.

I have done it in the past with different contract and it works out well.

There is no inflation adjustment on a mortgage so why should the o/p have one. If he buys the house for a particular sum plus interest for a given period, that should be the end of it.

The_Conductor

4ensic15 wrote: »

There is no inflation adjustment on a mortgage so why should the o/p have one. If he buys the house for a particular sum plus interest for a given period, that should be the end of it.

Because its not a mortgage- its a mechanism for a father to transfer the property to his offspring while securing an income for 'pension' purposes. Its an agreement in principle- to be copper-fastened- in a manner acceptable to both parties.

The knux of this- is the father gets an income out of the property- while eventually the child gets to own the property. It is normal for any pension payment to have some manner of accounting for inflation- while the polar opposite is the case with a mortgage- where inflation actively eats the outstanding debt- making it worth less in todays terms than it would otherwise be.

Don't equate it with a mortgage- which is a wholly separate matter- and it actually confuses matters when people try to phrase it as a mortgage- which has connotations that the proposal doesn't have.

secman

From revenue point of view the transaction would have to at "arms lenght". The "sale " price of the house should be that what it would expect to fetch on the open market. As pointed out by other people, each party should get independent legal advice from different solicitor and have a watertight legal document / contract drawn up and signed.

4ensic15

The_Conductor wrote: »

Because its not a mortgage- its a mechanism for a father to transfer the property to his offspring while securing an income for 'pension' purposes. Its an agreement in principle- to be copper-fastened- in a manner acceptable to both parties.

The knux of this- is the father gets an income out of the property- while eventually the child gets to own the property. It is normal for any pension payment to have some manner of accounting for inflation- while the polar opposite is the case with a mortgage- where inflation actively eats the outstanding debt- making it worth less in todays terms than it would otherwise be.

Don't equate it with a mortgage- which is a wholly separate matter- and it actually confuses matters when people try to phrase it as a mortgage- which has connotations that the proposal doesn't have.

It is unusual for a pension to have an inflation adjustment payout. Most no government pensions are annuity based. Annuities are never adjusted for inflation. The father only wants payment for 200 months. It is going to stop suddenly. What is being discussed here can be structured as a mortgage effectively a private mortgage.
The father needs security if the payments are not made on schedule, the o/p needs to be sure he will get the property if the payments are made. A private mortgage arrangement is the way to go imo. It is relatively simple to have drawn up, secures both sides and is easily understandable.

The_Conductor

4ensic15 wrote: »

It is unusual for a pension to have an inflation adjustment payout. Most no government pensions are annuity based. Annuities are never adjusted for inflation. The father only wants payment for 200 months. It is going to stop suddenly. What is being discussed here can be structured as a mortgage effectively a private mortgage.
The father needs security if the payments are not made on schedule, the o/p needs to be sure he will get the property if the payments are made. A private mortgage arrangement is the way to go imo. It is relatively simple to have drawn up, secures both sides and is easily understandable.

This is not the case in the UK, Ireland- or almost any EU country.
Certainly- it may not stay this way- given how expensive it is- however, as it stands- pensioners are singularly the most cossetted group in society. How long its going to stay this way is anyone's guess.

4ensic15

The_Conductor wrote: »

This is not the case in the UK, Ireland- or almost any EU country.
Certainly- it may not stay this way- given how expensive it is- however, as it stands- pensioners are singularly the most cossetted group in society. How long its going to stay this way is anyone's guess.

Until recently all private pensions had to be invested in an annuity once the person retired. It was changed a few years ago and a lump sum can be withdrawn but the balance has to buy an annuity. The payment does not adjust for inflation. Not everyone gets a Civil Service pension!

Peregrinus

And the differing opinions being expressed here about whether or not the monthly payments should include an element of inflation protection indicate precisely why both parties to this transaction must have separate, expert advice.