Can one buy a property for a friend and charge him rent?

by Readers Question

9:40 AM, 4th September 2020
About 2 weeks ago

Can one buy a property for a friend and charge him rent?

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Can one buy a property for a friend and charge him rent?

Suddenly it struck me, I have a friend who is struggling to raise enough deposit, as he waits longer to save for a deposit, the property values go up, so he is forever chasing his dream to own his own home.

So I had this brain wave, where I might be able to help him and gain something out of it at the same time whilst he also gains, so kind of double benefit for both of us. It is a bit like an interest-only mortgage. Here is how I suggest it might work provided it is drawn up all legit with a firm of solicitors and both parties remain truthful to the deal

So let me start, I have spare 100K sitting in my bank earning ZERO % interest! Not only that interest rates are unlikely to go up for a considerable amount of time, but the best I could get is also 2% in a Savings Bond. But I do not want to lock my money in a Bond, nor lend this money to my friend either, so what I propose I can do is to buy a 2-bed house in Nottingham that is where my friend lives, he can choose the house he likes, so I buy it for cash for him but under my own name, for about 100K,

He is currently staying in rented accommodation and paying around £500PCM rent for a 2-Bed house, He has a steady income, supporting a small family of wife and two children, not a problem here either.

So once I have purchased this house, we go through a proper contract where I will charge him same rent each month and gain by getting £6000 rental income on my 100K doing nothing currently in my account, but I sign a special agreement where he can buy that house in future for the same amount I paid for it today, so for instance in 10 years he could buy it for 100K from me when house prices may have gone up by another 50%.

This means he can buy from me a property that might be valued at £150K for £100K as per our special agreement, so he gains £50K and I gain 60K, so when I sell it to him for £100K I do not have to pay any capital gains tax on the sale of the property but only the income tax on the rental income.

This scheme can only work if he trusts me, and I stick to my promise that I will not back out to sell him at 100K rather than at a higher prevailing price 5 or 10 years later.

The idea is he should be able to buy his own property from me for 100K in 5 or maximum 10 years time, by which time he may have got higher savings and better credit references, thus qualify for a mortgage more easily, get a mortgage whereas he is not in a position to get a mortgage now.

Has anybody done something similar to help a friend or a family member if so are there any implications and other legalities? Can you sell a property under market value at the same price you bought trying to help a friend?

Suppose my friend does not keep his word, and moves out or buys another property, I still got mine and I can rent it to someone else, or sell it at a higher price and make a gain and pay any capital gains tax and I still got my original cashback which would have earned me nothing sitting in a savings account.

Any views or thoughts will be welcomed.

Mike



Comments

The Forever Tenant

10:18 AM, 4th September 2020
About 2 weeks ago

It's a nice idea, as long as your friend also remains a friend.

Renting to friends or family members can be a way of ending those relationships. You will be responsible for any repairs to the property and how will you feel if for whatever reason your friend stops paying rent to you.

Now unlikely as it is, but you can never tell what the future may bring. What if the value goes down? Would you hold your friend to paying £100,000 if the cost of the property is now only £90,000?

Now the other part is not something I can be certain about, but I don't know if you would be able to sell the property to your friend for £100,000 if the price of the property has greatly increased in those years. You may not be allowed to. There are likely others on this site that can answer that a lot more accurately.

Dr Rosalind Beck

10:34 AM, 4th September 2020
About 2 weeks ago

I make it a policy never to mix business and friendship. It nearly always ends in tears.

Penny Lyon

11:03 AM, 4th September 2020
About 2 weeks ago

Hi I'm no expert but I understand there is a legal way to do this through Lease Options 'option to buy' . I'll leave it to you to do the research but basically gives the buyer the right to buy after a specified period at a specified price. I think usually there would be little premium for this maybe on the rent in the meantime, but I suppose that's up to you. You would need to find a solicitor who understands lease options to protect both parties.

psquared

11:04 AM, 4th September 2020
About 2 weeks ago

Hi
I wish I had a good friend like you. But i also agree mixing business and friendship is extremely risky.... and i think it will change the relAtionship....i am a portfolio landlord and learnt the hard way not to mix.

In terms if your proposal...i am not offering legal or tax advice but i would think that you are ok to basically gift him 50k or so but fot tac purposes it has to be a commercial transaction so the revenue would consider you have made a gift which is liable to be taxed.

If you survive a further 7 years then i think the tax liabilty is completely extinguished but there is a potential tax liability.... if you go ahead i think it would wise to seek advice which shouldn’t cost very much.

I love your sentiment it is very kind and I sincerely hope it works out for both of you

psquared

11:08 AM, 4th September 2020
About 2 weeks ago

Just as an afterthought if you dont go ahead have a look at peer 2 peer lending. I ha e invested in several projects and receiving an 8% return.
It is investment and your capital is not protected but i have lent against income producing properties with a lot of equity in them so I consider it to be a reasonable risk for such good returns. I invest smaller amounts in mutiple platforms and projects which further reduced risk.... just a thought for you.

Bill O'Dell

11:15 AM, 4th September 2020
About 2 weeks ago

It might be easier to lend your friend the deposit, let him buy the house and you have a second charge on the property behind the mortgage company. Exchange letters with a fixed time period for the repayment of the loan, and an interest charge in the interim. The letter should specify how a sale is to be conducted if he cant repay the loan. You may want to get a solicitor to draw the agreement up.
He gets the capital gain, you have secured debtor and an income of the interest and a remedy if he cant or wont buy.

CAD Property Ltd

11:24 AM, 4th September 2020
About 2 weeks ago

Don’t rent to your friend, it will only end in tears.

Bill Maynard

11:25 AM, 4th September 2020
About 2 weeks ago

Would it be an idea to buy the property then offer your friend a mortgage at a price so you make a capital gain. You could take a sizeable deposit (assuming your friend has one saved up) then each payment he makes on a monthly basis would give you part capital repayment and part capital gain. As with a mortgage from an institution, you would have the security of the mortgage over the property, especially if the deposit is substantial. If you do it the rental way, I assume you'd have to pay tax on the rent. I have no idea about the legal implications of this idea.

moneymanager

11:35 AM, 4th September 2020
About 2 weeks ago

I may be wrong but I think the arrangement would be caught by CGT provisions relating to "selling below market value"

https://www.gov.uk/capital-gains-tax/market-value

I think you would run into regulatory issues but one thing that springs to mind is how a Sharia house loan works, they donlt charge interest but incremental purchase payments. It used to be that SDLT was charged twice, the first on aquisition by the bank and then on transfer on the final payment but that has now changed, I have no idea if you could emulate that without a banking licence.

silversurfer2017

13:45 PM, 4th September 2020
About 2 weeks ago

There is a problem with CGT selling a property to someone related to the owner when selling at below market value. E.g. selling to a son or daughter below market value, or even for a nil consideration, i.e. an outright gift, will count as a disposal at full market value under HMRC CGT rules. IMO Selling to a friend or even to to a acquaintance you feel sorry for would not fall foul of this rule. However I have read that some lenders will not lend on properties bought at prices substantially below market value. You may want to phone a few lenders to confirm whether this is the case.

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