Tax implications for property forced sale purchase and transfer back

Baby01032012

Thanks in advance for any opinions.

I have a relative with a large bank debt. They received a judgement order against their family home and so are being forced to sell.

Given their age their family have come up with the money to buy the house. Their family have come to me (distant relative) as a third party to ask that I buy the house at market value with their money and sign an undertaking to transfer the house back to them once their bank debt has been cleared. Note that sale of the house will only partly meet the outstanding debt.

I've asked to see the draft undertaking. Is there anything I should be concerned about from a tax perspective in this transaction. Any CGT or CAT on funds received from family to purchase property and on transfer to the family.

Peregrinus

Go straight to a solicitor's office. Do not pass go. Do not collect 200 pounds.

What the family is proposing is that you will be buying the house as trustee on their behalf. It's not clear from your account whether the money is coming (partly or wholly) from the debtor, or from other family members who do not owe the bank any money. Nor it is clear whether you're being asked to transfer the house back to the debtor, or to other family members. (If the latter, why is the transfer not to happen until the debt has been cleared? Why are the other family members not buying the house themselves in their own names, without involving you?)

If the trust is set up correctly, your tax position should be straightforward, but theirs may not be, so you all need to get advice.

But, tax aside, the whole thing has a slightly suss air about it. This may not be your intention, but the fact that the house is being put into your name before being transferred to the true owners suggests that the true nature of the transaction may somehow be being concealed from the bank. Using a trust to try and disadvantage creditors is always problematic, to put it no higher, and you should be very, very wary of lending your name to this unless you fully understand what is being done, why it is being done and why it needs to be done that way, and unless you've had independent legal advice as to what your own responsibilities and liablities might be.

On the tax side, obviously there's stamp duty on the transfer of the house to you. Set up the trust properly at the outset, and you should be able to avoid a second tranche of stamp duty when you transfer it on to the true owners. Similarly setting this up right at the outset should avoid any CGT liability on the second transfer of the house (assuming its value has risen, and there is a gain).

Who will live in the house? Will they pay rent? If yes, you need to set up matters so that the rent is treated for tax purposes as the income of the true owners, not your income. If they don't pay rent, there's a question of whether they have a CAT liability as a result of receiving a gift of the free use of property. That's their liablity though, not yours but, still, if it's not recognised and provided for in the arrangement it could cause everyone involved, including you, a deal of trouble.

This is going to cost you (or somebody, anyway) a bit of money in professional fees to get this set up properly. Spend this money and do not begrudge it. If this goes ahead but is stuffed up, it will cause years of grief and family rows, and potentially considerable tax liabilities that could have been avoided.