My brother and I inherited the family home from my mother when she died a few years ago, and we now own it as joint tenants. It is worth around £250,000 with the mortgage paid in full.
My brother has lived there long before my mother died – about six years in total. He has no other family (except a long-lost half-brother), is on the brink of state pension age and will have little extra income when he retires, although he will have some savings to fall back on.
We decided it would be good for him to move closer to us. Since house prices here are much higher, it will cost him virtually the full sale price of the family home to get him a decent flat – but I’m willing to sacrifice my share as a favor to him.
My brother is 15 years older than me and his will leaves everything to me. My wife and I would therefore consider the estate a nest, perhaps for our children (although we don’t have children yet).
But there are probably tax considerations that we haven’t thought of yet. For example, if we buy my brother’s new home together, will the purchase be subject to stamp duty on the second home, because I already own a home?
If so, is there a way for my brother to buy the flat in his name, but still have it legally jointly owned by the two of us?
Are there any other legal or tax implications of such a plan? Is there an alternative strategy we can consider? Via email
There are various legal and tax considerations when buying a home together, especially when one party is not going to live in the home
Ed Magnus of This is Money replies: Buying and owning real estate together with someone always carries some risk, even if that person is a sibling, spouse or partner.
While you can trust your brother to leave everything in his will to you, there’s always a chance he’ll change his mind.
Since the flat purchase requires a serious financial contribution, it is therefore important to obtain legal advice on the best way to ensure the intended result.
This includes discussing the different forms of ownership available to you and whether a trust statement may be required.
What is a statement of confidence?
A Declaration of Trust is a legally binding document that specifies the financial arrangements and intentions agreed upon between the joint property owners at the time of purchase.
When you buy a house together, you can choose whether you want to register with the Land Registry as joint tenants or as joint tenants.
As Joint tenants, you will both own the property equally – there are no separate, identifiable shares.
If one person were to die, the surviving owner would automatically get the other’s ownership of the property.
This is the most common form of co-ownership of real estate and is often used by couples who buy a house to live together.
As tenants mean, you and your brother would each own separate, identifiable shares in the property. These can be equal or unequal shares depending on what you decide, for example a 50/50 or 70/30 split.
If a person died, their share of the property would not pass to the other party, but to whoever they chose to inherit it in their will.
As you rightly point out, there are also tax considerations.
Under current rules, anyone buying a second home in the UK is subject to a three percent stamp duty.
The final phase of the Stamp Duty Holiday will end on September 30, meaning the zero stamp duty rate will return from £250,000 to pre-holiday levels of £125,000.
For example, if you were to buy a property for £250,000, you would have to pay £7,500 as a second home owner until September 30, but after September 30, this would increase to £10,000.
You should also consider whether there are any capital gains tax implications related to the sale of the home you currently own with your brother, and whether your further purchase would leave you with potential estate taxes in the future.
We spoke to Richard Brooks, tax partner private client at accountancy firm MHA Monahans, Rachel Griffin, tax and financial planning expert at Quilter, Chun Wong, partner at Hodge Jones & Allen and Carol O’Leary, head of transportation at Wright Hassall to help answer your riddle.
What is capital gains tax?
Capital gains tax may be levied on any gain you make on an asset that has increased in value when you sell.
Homes currently have a capital gains tax rate of 18 percent for base-rate taxpayers and 28 percent for higher-rate taxpayers — but any big gains would mean you’re probably paying the most at the higher rate.
This is because your capital gain is added to your normal income to determine the tax rate.
So even if you’re a base rate taxpayer, the impact of a significant capital gain will likely push you into the higher rate.
The tax threshold for the base rate is £50,000, so if you’re a taxpayer earning £30,000 a year, £20,000 of your capital gains will be calculated at 18 percent, while the remaining £67,700 of the gains will be taxed at 28 percent.
Everyone is entitled to an annual capital gains tax deduction, which currently means your first £12,300 of any gain is tax free.
For example, if you make a capital gain of £100,000, it becomes £87,700 after your annual tax-free allowance of £12,300.
Is he liable for the extra stamp duty surcharge?
Rachael Griffin responds: Whether you buy the property with your brother as joint tenants or joint tenants, you will have to pay the additional 3 percent stamp duty since this is your second property.
Will they have to pay capital gains tax?
Richard Brooks answers: Because your brother has been living in the house for quite some time, he is exempt from paying capital gains tax due to the owner-occupied home deduction.
Because you did not live in this house, you pay capital gains tax.
This will be charged on any increase in the property’s value since your mother’s death, but only in proportion to your 50 percent share of the property.
For example, if the property has increased from £200,000 to £250,000, this means that your share has increased in value from £100,000 to £125,000 and you will therefore have to pay capital gains tax on the £25,000 profit.
While this can be reduced by your capital gains tax deduction of £12,300, the selling expenses, including brokerage and legal fees, as well as any costs of improving the property.
Capital gains are subject to a maximum tax rate of 28 percent, depending on your income level and the availability of exemptions.
What about inheritance tax?
Richard Brooks answers: Another concern may be inheritance tax on the property you decide to buy.
However, it seems that given the values involved, your brother’s net worth appears to be below the threshold where this would become a problem.
Inheritance tax only applies to assets over £325,000.
In addition, if a primary residence is left to a family descendant, an exemption of up to £175,000 is usually still available.
What are the legal risks of buying together?
Rachael Griffin responds: Buying the house as a co-tenant seems like a less risky strategy, as much depends on your brother bequeathing the house to you in his will.
First, there is a risk that at some point he will change his mind and not leave ownership to you when he dies.
Second, if you die first, if you bought the property as co-tenants, your share of the property goes to your brother, not your wife or family.
Buying the property as joint tenants instead gives you some assurance that if you die first, your share of the property — which we assume is 50 percent — will be held for your wife.
The remainder will be paid to your wife and family if your brother dies and his will remains unchanged.
How can he reduce the tax on his further purchase?
Richard Brooks replies: There are several options for your further purchase.
You could buy together with your brother, also called a half share, and let your brother live there alone.
However, since you must declare ownership of a second property, you owe stamp duty. This would mean a surcharge of 3 percent of the value of half the share price.
Or you can lend the money to your brother so that he can buy the property solely in his name. This way you can be sure that you do not have to pay the surcharge of 3 percent.
What about keeping it in a trust?
Chun Wong replies: It is also important to note that the legal title and the economic title of a property are two different things.
Your brother can be the legal owner, which is stated at the Land Registry, but you can then keep him in confidence for both of you.
In order to protect your interests, it is advisable to have a formal statement of confidence, in which this is recorded, registered with the Land Registry.
Richard Brooks replies: Using a trust can also ensure that property is left to whoever you want in the family after your brother’s death, including children.
Can you explain how the Statement of Confidentiality works?
Carol O’Leary answers: A trust statement could be drawn up between all parties establishing actual ownership of the property.
That would then be registered against the property and a restriction put in place to prevent sale unless the terms of the statement of trust are met.
All wills must be updated to reflect this property and the statement of trust.
Do we avoid paying stamp duty if we buy within a trust?
Chun Wong replies: The higher land tax is payable on any interest in a property you acquire, if it is not your only place of residence in the world and is worth more than £40,000.
This includes all properties in which you have a beneficial interest under a trust.
This means that it does not matter that you are not the legal owner – the higher rate of land tax still applies.
Any other considerations?
Rachael Griffin responds: Your brother should also consider how owning real estate can affect his ability to claim certain benefits, such as for social care.
With reforms in social care on the horizon, there may also be other factors to consider in the future.
Richard Brooks answers: Depending on the strategy you choose to acquire the property between you and your brother, you may need to ensure that you have an appropriate will to handle the death succession.
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