Property Transfer Problem

Hello All,

I was wondering if anyone has any ideas about the following scenario:

My wife and I have a portperty in Newcastle-upon-Tyne in which we currently reside. It is valued at around £180000 and the is £85000 outstanding on the mortgage.

We are looking to relocate due to work requirements but would like to keep the property in Newcastle.

My mother, who currently live in Portugal, is going to move back to the UK.

What I was thinking of doing was getting my Mum to repay the outstanding balance of the mortgage and let her live in the property for as long as she needs. The property would still be owned by me and my wife.

In the meantime we would purchase a property to live in near to my new work location and take out a new mortgage to fund the purchase.

Does anyone know what the most tax efficient way of achieving this would be?

Thanks in advance

John

Would she be taking over the mortgage payments, or would she be paying off the whole £85k up front?

In the first case, it's easy to view this as an almost tax-neutral rental arrangement: She pays you just enough rent to meet your mortgage commitments (and other expenses like insurance, repairs, maintenance, etc), and you would be taxed only on the income represented by any capital element of the mortgage repayments.

In the second, it's more complicated. It could be a gift of £85k (with the usual inheritance tax implications, especially as it's clearly not an outright gift, but with strings attached, in this case the expectation of being allowed to live there), or it could be an arrangement whereby in effect she buys your debt from the bank, so that you now owe her instead of owing the bank. Even if no money actually changes hands (if, say, the mortgage payments you make to her (capital and interest) exactly balance the rent she pays you), both of you would end up paying some income tax. E.g. if 1/3 of the mortgage payments were capital and 2/3 interest, she would pay income tax on the 2/3, and you on the 1/3.

Is this likely to be a temporary arrangement, with the expectation of moving back to the Newcastle house in due course, or would you expect to sell it once Mother no longer needs it?

If you're going to sell some number of years down the line, you would become liable for capital gains tax because the property will not have been your main home for the entire duration of your ownership of it. There are reliefs available to mitigate much (if not most or even all) of the taxable gain. To this end it helps to consider her as renting the place, as this will give rise to Lettings Relief, which can make up, depending on details, for all of the loss of Private Residence Relief. The longer you've already lived there, the better too.