I want to loan parents money to buy a better home in retirement

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My parents need to move into a property that is on one level and easy to maintain. 

They have found the perfect place, but it comes in at £75,000 above their budget and the vendor will only sell to cash buyers. My parents’ property is not yet on the market.

I would like to help them by giving them an interest-free loan for the full cost (£375,000) so that they can secure the property as cash buyers.

They would be able to pay back £300,000 when they sell their property. Are there any tax implications in giving them such a loan?

As the new property will cost more than the current one, I would like to give them the additional £75,000 they require to help them.

Is it best to gift them this money, to buy a share of the property or to give it as an interest-free loan to be repaid when they sell the property?

I am wondering what the best way to do this would be taking into account tax liabilities – if I was part owner it would be a second property – and what would happen to my money if they had to go into care and were required to use equity in the bungalow to pay for this.

I have one sibling who is not involved in this purchase if that is significant regarding inheritance.

Tanya Jefferies, of This is Money, replies: This is a generous move on your part.

However, you understandably want to avoid any negative tax consequences, and the possibility of your money being swallowed by care fees if you simply give it to your parents outright.

We asked a financial expert to explain your options and their pros and cons, to help you decide the best course of action for you and your family. 

Ian Dyall, technical manager at Tilney Financial Planning, replies: There are a number of different taxes to consider here, plus the potential impact that that may occur if your parents need to pay for care in the future, so whichever approach you take it is important that the arrangements are documented properly.  

Lending £375,000 to your parents on an interest free basis, to help them buy the property, should have no tax consequences for you or your parents, apart from the usual stamp duty that your parents will pay on buying a new property. 

If there is no interest payable, then there will be no taxable income for income tax purposes.

It is important that the loan is documented in a loan agreement.

This ensures that the money would be repaid to you should your parents die before selling their home, and it avoids a potential inheritance tax charge which may occur if the amount was seen as a gift to them rather than a loan.

You outlined three different ways of permanently providing the £75,000 that they need and each of these options have their advantages and disadvantages. I will look at each in turn.

Gifting the money to them

Gifting the money to them is probably the simplest at outset as no formal documentation is required (although it would be worth explaining that it is a gift in a letter).

Once you have made the gift the money belongs to them, so there is no risk of them losing their home if you were to become bankrupt or get divorced in the future. The other two options leave them more vulnerable in these circumstances.

However, gifting money to them may lead to a poorer outcome in the longer term.

The money would form part of your parent’s assets which could increase their inheritance tax liability if they have one.

If your parents needed residential care then the money may be lost in paying the care fees, although the value of the property should not be taken into account whilst one of your parents is living there.

Finally, your parents would need to change their will if they want to repay that money to you on their death.

Buying a share in their home

If you buy a share in their property for the £75,000 then you need to think about the tax consequences for you.

There would be a stamp duty liability for you at the normal rate plus an additional 3 per cent, as it would be your second property.

When the property is eventually sold, the growth on your share in the property would be subject to capital gains tax as it will not qualify for private residence relief.

There could also be issues if you ever became bankrupt or got divorced, as part of your parent’s property may need to be realised in those circumstances.

On the plus side, that share of the property would not be lost if care fees needed to be paid, and for inheritance tax purposes the value of their share of the property may benefit from a small discount.

This is because an 80 per cent share of a property is not worth 80 per cent of the total value if there is a co-owner other than your spouse.

Lending the money to them

Possibly the best option is for you to leave £75,000 of the original £375,000 loan outstanding and secure it against the new property on an interest free basis.

This has a number of advantages. The normal rate of stamp duty should apply to the whole of the purchase price.

If your parents need care then the value of the property taken into account should be reduced by the loan secured against it.

The whole of the growth in the property’s value should be exempt from capital gains tax if your parents sell it as it will qualify for Private Residence Relief.

Finally, the debt would reduce their inheritance tax liability on their death.

If you choose this route then your parents probably would not need to change their will as the loan would be repaid to you on their death and the remainder of the estate would be distributed in line with their will, which I presume is what they want.

Although it is always worth reviewing wills when big changes like this are made.

It is important that the loan is properly documented, so you would need to ask a solicitor to draw up the necessary documents and provide advice based on a more detailed understanding of the circumstances of you and your parents.