Q My sister and I have each just inherited a half share of a property from our late mother and father. The estate has been finalised and ownership of the property has been updated on the Land Registry to reflect this.
I would like to buy out my sister’s half and live in the house myself. My question is regarding taxes liable from buying her share. Speaking with my sister, we have agreed that she would be willing to sell me her half with monthly payments from me. We would prefer doing this as it would work out cheaper than getting a mortgage from a bank.
Will she be liable for any taxes – eg income tax – on these monthly payments? I know she will not be liable for capital gains tax as she will only be receiving the value of her share of the inherited house. The property is valued at £150,000 and I would be making monthly payments to my sister of £500 until I have paid her the total of £75,000 for her half. NA
A In agreeing to let you buy her share of your parents’ house in monthly instalments, your sister is being incredibly generous. She is essentially giving you an interest-free loan – which won’t be repaid until 2027 – and giving up the interest she could earn on a lump sum of £75,000 if you were to buy out her share all in one go by taking out a mortgage on the property.
If she transfers the property into your sole name before you’ve paid her the full £75,000, she’s also taking a risk that, as she would no longer own any of the property, she would have no control over it and couldn’t force you to pay what you owe her. It would be more in your sister’s interests to wait until you have paid her in full before transferring ownership to you. But the downside of doing that would be that if the house rises in value over the 12-and-a-half years it takes you to pay for her share, she could face a capital gains tax bill.
Contrary to what you say, there is a potential taxable gain if, on disposal of her share (ie, when she transfers ownership to you) the value of the property is greater than its value when she acquired it (taken to be the date of death of the parent from whom she inherited it). But you are right that the gain would be zero if the value on disposal was the same as the value on acquisition.
If your sister was charging you interest on the money she is effectively lending you, the interest would be liable to income tax. But as the money you are paying her is just return of capital, there’s no income tax bill.
Finally, I’m not sure why you think that the very one-sided arrangement you are proposing – which works entirely in your favour and has little to recommend it from your sister’s point of view – is preferable to your getting a mortgage.
For just £17.50 more than the £500 you plan to pay your sister, you could get a mortgage of £75,000 with an interest rate of 3% and a term of 15 years. And your sister would get a cash lump sum of £75,000 and no worries.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com
