A little gentle probing reveals that there is a £150,000 difference between the offer price that Brian and Judy have had for their home and the market value of his parents’ home. I am not a mortgage specialist but as they came to me armed with a completed expenditure questionnaire, it did not take long to calculate that they could indeed afford a mortgage.
We then had a general discussion about the credit crunch, current mortgage rates and the attitude of the banks. Both Brian and Judy are self-employed with separate businesses.
One of the benefits of being the trusted adviser for the whole family, including Brian’s siblings and parents, means that I can look at the situation from all angles. In other words, I can help them formulate an outcome-based solution that suits the whole family.
Brian’s parents have already priced the cost of the new build at £100,000 less than Brian and Judy’s house. I am therefore able to suggest that instead of taking on board a mortgage, they come to an arrangement within the family where they hand over the proceeds of their house sale and draw up a deed via their solicitor to owe the balance to Brian’s parents.
A family conference is set up to discuss this and to run through all the figures, the objectives and the likely outcomes. After a short period, the whole family are in unanimous agreement that this provides the most suitable solution all round.
It is also agreed that the preferred option is that Brian and Judy will not have to repay the capital until the death of the second parent, at which point it will be deducted from Brian’s inheritance, even though it will be counted in the estate to calculate any inheritance tax that might be due.
However, in their circumstances, inheritance tax looks distinctly unlikely unless the new-build house rises substantially in value or the nil-rate band stops rising.
In the meantime, Brian and Judy will pay Brian’s parents a commercial rate of monthly interest. After the new build and associated costs, it is doubtful, due to the parents’ pensions, that they actually need the extra income and therefore further planning can take place around the gifts out of normal income regulations, which enable Brian’s parents to make regular and habitual payments towards their grandchildren’s school fees.
Provided that such gifts meet the regular and habitual IHT rules and their standard of living is not affected, then under current legislation this is legitimate planning. It is not impossible that legislation will change but as things currently stand, this is a very satisfactory solution all round. However, the next point of call is the family solicitor to draw up an appropriate deed to cover all the eventualities and to ensure that all members of the family and their spouses have wills that are drafted in the most tax-efficient and fitting manner.
From Brian and Judy’s point of view, they have avoided what could have been a hefty arrangement fee. From the parents’ point of view, they have achieved their objective of building a smaller house and will have Brian and Judy and their grandchildren on hand as they get older.
In the meantime, there is all the trauma of the building project to endure, even though Brian’s father is relishing the opportunity to be project manager.
The final piece of the jigsaw is to ensure that Brian and Judy have adequate protection cover encompassing life insurance, critical-illness cover and disability protection to ensure that the arrangement does not fall apart in the event of a catastrophe.
As with any financial plan, it needs to be reviewed every year to check that it is still appropriate, relevant and suitable given any change in circumstances and legislation.
Yvonne Goodwin is director of Yvonne Goodwin Wealth Management