Gradual sale of BTL property to a current tenant?

by **chris153** on Sun Feb 20, 2011 1:21 am

Hello--Wonder if anyone can help refine my creative thinking about a possible "gradual sale" to a current tenant of a BTL house that my wife and I co-own?

Am considering the possibility of setting up an agreement to transfer a fixed amount of ownership (say £21,000 worth) per annum over next 3-5 years or so (could this minimise our CGT liability?) until current tenant pays off the balance of agreed selling price to become the property's legal owner outright. The idea would be to have him pay a reducing rent as their ownership proportion rises. The property is mortgaged, so for one thing would any such scheme require adding his name to the existing mortgage deeds, or possibly exchanging my wife's name for the tenant's name? What would be the stamp duty or other tax implications for myself and for the current tenant?

If it helps to be more specific, purchase price in 2004 was approx £240k, value today ~£350k, rent approx £1500pcm. I suspect this type of graduated transfer of ownership arrangement is not very common as it requires an extraordinary landlord-tenant relationship (which we have in this case) and that it may be just too complicated to operationalise such that solicitor's bills wipe out any tax savings...or am I wrong about that?

Any advice/suggestions/variations on the theme, etc. much appreciated!
Thanks,
Chris

by **Incredulum** on Tue Feb 22, 2011 6:35 pm

It certainly would minimise your CGT liability. BUT there would be other exposures for you to financial risk. And also the mortgage company might not be very happy at all. And what if the T wants to sell before you have sold him everything. You'd need a very robust agreement.

SDLT would be paid on the total consideration - 350k, so no saving there.

Your gain is approx 110k. We have a tax year end approaching. Personally I'd see whether you could sell 50% to him the afternoon before the year ends, and the other 50% the following morning. Then you can access 4 annual allowances (two years, you and your wife) and reduce the tax bill by nearly half. You might need some sort of bridging finance overnight.

If you can do this, then the tax cost is only 20k (or less if you are not 28% CGT payers). Barely seems worth the considerable commercial risks.

by **section 44** on Tue Feb 22, 2011 6:48 pm

Tax aside, is there any resitrictions around who can provide shared-ownership homes (which is what you are suggesting)?

by **jpg123** on Wed Mar 02, 2011 12:40 am

I was looking at doing something similar, but selling to a limited company of which my wife and I were directors. Is this legal?

by **Incredulum** on Wed Mar 02, 2011 10:28 am

by **jpg123** on Wed Mar 02, 2011 2:46 pm

Sorry, typo in the last post. It should have said that my wife and I ARE directors. If my wife was to sell a property held in her name she would have to pay CGT. If we were to sell a %age of the property each year to our company, keeping each purchase below the CGT threshold then I don't think we would have any tax to pay. We would make a loan to the company in order to fund the purchases.

by **Incredulum** on Wed Mar 02, 2011 3:08 pm

Don't see a problem with that. SDLT will apply of course. And of course any future profits will be taxed in the company.

by **chris153** on Sat Apr 30, 2011 10:18 pm

Thanks to all, especially to Incredulum, for comments. In my case, the partial sale didn't materialise--tenant was able to buy another place instead but it was good to think outside the box with a creative possibility. I suspect others may want to do something along the lines of this thread especially if it enables them to hang on advantageously tracker-related pre-crunch mortgages....

by **BTLguy** on Fri Jul 01, 2011 11:11 am

Hi All,

I too have had the same idea of selling my BTL property to my current tenants. I purchased my property in September 2007 prior to the crash and paid top end for it (£146,000). I originally took out a Northern Rock 80% LTV fixed rate BTL mortgage which has now moved to the SVR (4.75%). Therefore the mortgage debt is currently £119,000 and payment method has always been interest only.

Due to risk of interest rate hikes, I have tried to remortgage but this has proved difficult as I work on fixed term contracts. This has meant Northern Rock are the only lender who will offer me a re-mortgage but at 75% LTV. All the property in the area has slumped by around 10% (so estimated valuation is around the £130K mark). This basically means Northern Rock are looking for an additional £20K (which I don't have) to bring the LTV down to 75%. At this point, (if possible) all I care about is getting back what I paid for the property, but don't want to be overly exposed to potential interest rate hikes.

However, I have wonderful tenants who have expressed an interest in buying the property - but can't afford an initial deposit to get a residential mortgage. I was therefore wondering if anyone could provide any advice on an arrangement/potential agreement on how I could gradually sell my property to my tenants for ideally around what I paid for it. I have tried to do research on this and have not been able to find any information. Any views/experiences on the risks and rewards of this potential strategy would be highly appreciated.

Many thanks.

by **section 44** on Fri Jul 01, 2011 11:30 am

Tax aside, I would be careful.

What would happen if, for example, the tenants owned a proportion of the property and defaulted on the rent? Would you be able to take possession of the property given that they would also have a beneficial interest in it?

Would this be a some kind of shared ownership scheme that can only be offered by certain persons such as housing associations? Is it regulated?

What would happen if they were only ever willing/able to buy a proportion of the property from you? do you think that there would be a ready market for less than 100% of a property? even if you could find a willing buyer, would they be able to get bank funding?

What would happen if the tenants co-owned a proportion of the property and they had financial difficulties (perhaps went bankrupt)?

Would you co-own the property legally or in equity only? Would the tenants accept the latter only and, if not, would your lender allow them to become co-registered proprietors?

I do not know the answers to these questions but they are things that I would consider.