Buying Mums retirement bungalow

Hi Paul

The good news is that there is a solution. The bad news is that there are a whole host of reasons why your current idea cannot possibly work including the following:-

1) Sale and rent back is highly regulated by the FCA
2) Buy to let mortgage lenders will not entertain this arrangement due to regulation and also the property having an over 55's restrictive covenant
3) You would not be solving the IHT issue or the risk of care fees because the sale proceeds would still form part of your mothers estate

I suggest you take professional advice - see >>> http://www.property118.com/member/?id=2203
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Reply to the comment left by "Mark Alexander" at "01/10/2014 - 11:11":

Hi Mark,

Re. your point I): Do FCA rules on sale and rent back apply to arrangements between family members?

And 3): Why would the sale proceeds still be part of the mother's estate? I presume the intention is that the sale proceeds are given in cash to Paul, at which point it will take seven years for the money gradually to fall out of her estate.

I don't believe there is any 7-year rule as regards assets for care home fees, but anecdotally many local authorities now look very carefully at the reasons for an older person selling their principal residence; if they judge it was only done to avoid paying fees, they will assess the mother as if she still owned the house. So Paul and his mother will need some strong reasons to explain why she felt she could afford to sell her house, and therefore open herself up to paying rent in future. One example might be: Paul needs the money (the house asset and the forward rent), whereas she doesn't, which is presumably the case if Paul thinks she has a potential IHT liability.

Yes, she will have to pay a market rent and have a proper assured shorthold tenancy agreement, otherwise the HMRC will judge she has a retained benefit and the house will still be counted as part of her estate.

But Paul, overall, why do you need to buy the house and why would a BTL mortgage be necessary? Why doesn't your mother just give you the property, and then start paying you rent? I think this will mean there'll be no stamp duty to pay, and no mortgage or short-term loan costs - your only cost will be £35 for a Land Registry transfer.

Reply to the comment left by "Tony Atkins" at "04/10/2014 - 09:28":

Hi Tony

Talk of the mortgage requirement is the knock out punch.

There are exception to the FCA's SARB regulations and immediate family are included. HOWEVER, regulated advice is still required - see >>> http://www.fca.org.uk/firms/about-authorisation/do-i-need-to-be-authorised and http://www.fca.org.uk/firms/financial-services-products/mortgages/sale-and-rent-back

Depending on the value of the estate, IHT might not be an issue. However, a potentially exempt transfer "PET" will be created if either the property or the sale proceeds are gifted to any person other than a spouse. As you say, IHT may be payable if death occurs within 7 years of the gift.

With regards to the powers of the authorities, they do have the ability to unwind transaction of this nature if they can prove they were put in place to avoid paying for long term care.

Just one point that very few people are aware of, if any sale proceeds are invested into a life insurance bond which is written into trust the funds are protected from both care and IHT. This is because they are technically life insurance policies because the sum assured is 1% greater than the amount invested - there is no medical underwriting and because the value of insurance life policies are not factored into wealth assessments by the care authorities. Also, a life insurance policy written into trust no longer forms any part of the estate of the donor for IHT purposes.

Always take professional and insured advice.
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Thanks Mark - interesting. I don't see the relevance of the SARB regulations though: Paul isn't a "firm" - he is just a private individual taking out a single buy-to-let mortgage and his mother will just happen to be his tenant. There is no question of him buying at a reduced price in exchange for a reduced rent or anything like that, so why would he fall under SARB?

On the rest of your reply, have I go this right: if one ignores the 55-age-limit in Paul's example here, there is nothing to stop a child from buying their mother's house using a BTL mortgage, and then taking the mother as a tenant paying a proper market rent; the mother then invests the sale proceeds in a life insurance bond written into trust (presumably to benefit the child on death), which means the money will be protected from both IHT and care fee assessments.

If it's that straight-forward, why isn't every family with concerns about IHT or care home fees (and enough capital to raise a BTL mortgage) doing this?

Check with other owners and the managing agent of the complex as frequently the new owner has to be vetted and approved together with a fee and onward sale restriction. Retirement homes are very time consuming as investments.