Concessionary Purchase

Concessionary purchase describes when you buy a property from family, often mum and dad, for less than the property's current market value - it is also called a transaction at under value. The advantages are:

·        you can pass on property to your children at a more affordable level;

·        you can keep property within your family;

·        you can transfer under the market value or for zero consideration; and

·        (if required) there are many mortgage lenders who offer concessionary purchase mortgages.

The challenges that you face include:

·        You need to inform your mortgage lender the property is being sold under market value. Failing to do so could mean the mortgage offer is rescinded or takes time to change;

·        The gift may have an impact for inheritance tax purposes; and

·        The transaction could be voided if the party/ies gifting the property undervalue is made bankrupt.

In this article we explain the conveyancing process to transfer a property under market value, what are the costs including what stamp duty is payable and how long the process takes.

Concessionary Purchase vs. Gifted Deposit

A concessionary purchase differs from a gifted deposit because with the former, no exchange deposit funds are involved or change hands. However, similar to a gifted deposit, the discount must be an outright gift and not subject in any way to future repayment or claw back by the party giving the gift.

It's strongly recommended that you take advice from an independent mortgage broker if you are considering a concessionary purchase because not all lenders offer mortgages for them and conditions may vary. 

You should additionally instruct solicitors with concessionary purchase experience to carry out the conveyancing because aspects such as stamp duty and the independence of legal advice for seller and buyer must be handled correctly given that a property is being sold for under market value.

How does a concessionary purchase work?

Let's say your Mum has a property valued at ￡200,000 which you'd like to buy but, although you've got the affordability to do so (salary multiples for mortgage repayment), you've not got any deposit funds to speak of (a standard 10% deposit would require savings of ￡20,000).

Your Mum can help you by offering to sell you the property for ￡150,000; the difference between the sale price and the market value of the property acts as the deposit.

You then have to find a lender to grant you a mortgage loan for the ￡150,000.

Which relatives can offer you a concessionary purchase?

Many lenders will consider granting mortgages for concessionary purchases where the sellers are:

·        Parents

·        Brothers

·        Sisters

·        Grandparents

Some lenders will consider granting mortgages for concessionary purchases where the sellers are:

·        Uncles

·        Aunts

·        Step Parents

·        Cousins

Some lenders require you to put up a minimum 5 – 10% mortgage deposit from your own savings (i.e. which cannot be gifted by a relative) as security for the mortgage loan.

NB This mortgage deposit is not to be confused with an exchange deposit, which, in a standard conveyancing transaction, a purchaser must pass to a vendor at the point of exchange of contracts 

Can your relative stay in the property after you've bought it?

Not normally: most expect the seller to move out when you complete – known as vacant possession. You should also be aware that if your lender agrees to allow your relative to stay in the property, they may not, for example, allow you to build an annex to house them.

This is one of the reasons why it's a very good idea to seek advice from an independent mortgage broker, who can accurately pinpoint which lenders might fit your particular needs. Additionally your lender should be well-considered because the transaction normally involves close family members, for whom you should do all you can to keep potential stresses and mistakes to a minimum!

Can your landlord or a developer offer you a concessionary purchase?

In theory you can buy a property which you've tenanted for at least one year from your landlord as a concessionary purchase, known as a landlord discount, the challenge is finding a lender who will permit this.

The same holds true for a developer offering you a large discount on the selling price of a property; a concessionary purchase is permissible in this case, known as a developer discount, but new build properties are likely to be regarded as higher risk by lenders.

You are even permitted in law to take up a concessionary purchase from a normal open market vendor, however this would be regarded as even higher risk and any lender will want to establish, for example, why the vendor wants to sell at a discount.

You should note that the higher the risk as perceived by the lender, the more likely that you'll be expected to present a deposit from your own funds, and this may be as high as 15 – 20%.

Can you Buy to Let a concessionary purchase

Yes, as long as you find a lender who allows this.

Concessionary purchases and stamp duty

Stamp Duty is calculated on the sale price/the consideration that's being paid to the seller, NOT the actual market value of the property, so for the previous example (property market value ￡200,000, sold via concessionary purchase for ￡150,000) the tax would be on the ￡150,000, therefore ￡500.

If the dwelling is the seller's second home, then the seller is liable to pay Capital Gains Tax on the proceeds.

Concessionary purchases - Sale and Purchase or Transfer of Equity?

It is advisable a Sale & Purchase is undertaken for all concessionary purchases where:

·        None of the original owners are going to remain on the legal title; and/or

·        The new owners are going to be getting a mortgage.

The original owner/s are liable to capital gains tax on the sale proceeds if the dwelling is a second home and because the discount is a gift, it may be subject to inheritance tax if the original owner/s die within 7 years of the concessionary purchase transaction. Both sides of the transaction should receive separate legal advice and use separate solicitor firms for the conveyancing.

Beware the inheritance tax 7 year rule

If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Years between gift and death

Tax paid

less than 3

40%

3 to 4

32%

4 to 5

24%

5 to 6

16%

6 to 7

8%

7 or more

0%*

*Gifts are not counted towards the value of your estate after 7 years.

Removing one parent, father or mother, leaving one on the title and adding children

It is advisable a Transfer of Equity is undertaken for all gifted concessionary purchases, where:

·        One or more of the original owners are going to remain on the legal title.

A Transfer of Equity may still have tax implications for the current owners of the property, for example Inheritance Tax on the gift (click for more information from HM Government) or Capital Gains Tax on any gain. The current owner being removed may also need independent legal advice. The new owners would be taking a gamble by obtaining a property with potential defects and future sale-ability or remortgage prospects. The child could be left with a property that can’t be sold in an ‘at arm’s length’ transaction or be able to register a mortgage interest over the title.

For parents who jointly own their property with their children it is advisable to hold the property as Tenants in Common and draft a Deed of Trust to set out your beneficial share in the property. You can declare any share in the property 99% / 1% so that any gain in the property is shared 99% to your children and 1% to you. You could even share the property 80% to you and 20% to your children, and then over time, agree to gift shares in the property to your children.

Make sure to speak to a tax specialists when gifting money as part of your Inheritance Tax Planning.

It should be clear that you should seek expert legal advice for a concessionary purchase and that you solicitors should be highly experienced in this field to carry out the conveyancing efficiently. Macbeale Property is highly skilled in this area and we can appoint solicitors from separate independent firms to represent both buyer and seller.