My elderly parents bought their current home in Birmingham in their late 50s with an interest only mortgage of £130,000. Now at the age of 78, the mortgage term is due at the end of next year, and they do not have savings to repay the debt. As a consequence, they are faced with having to sell their house to repay the debt. Their income is limited to the state pension, they have no savings or any other form of income. They do not have sufficient equity in the house to buy another home, the equity they have is only sufficient to pay rent for about eight years at current market rental rates. Faced with them potentially being homeless at the age of 78, I am considering taking out a mortgage to pay off theirs, and buy their house so they can live in it rent and mortgage free for the remainder of their lives, giving them the peace and security they need and deserve. I can only afford to take out an interest-free mortgage of £150,000, with my repayments being around £400 per month (estimated). Their house is valued at £250,000, so they have agreed to sell it to me for £150,000, as I will be responsible for the mortgage payments, and they will have no rent or additional costs. My question is, will my parents of myself incur any additional costs such as inheritance tax or stamp duty land tax as a result of this transaction? Secondly, are there any alternative options I should consider that will enable them to continue living in their house without incurring additional costs?

Arthur Weller replies:
If you do as you propose, your parents will be deemed, for inheritance tax purposes, to be gifting you £100,000 - because they are selling to you a house worth £250,000 for £150,000. This is a potentially exempt transfer (PET). HMRC would probably claim that this £100,000 is a gift with reservation. You will have to pay stamp duty land tax on £150,000 (and probably you will have to pay the extra 3%). If I understand you correctly, you have the option of borrowing £150,000 interest-free, but you need to make capital repayments of £400 per month to your lender. If so, why don't you simply lend the £150,000 to your parents (i.e. don't buy the house) and stipulate in the loan agreement that they need to make capital repayments to you of £400 per month instead of the £400 per month interest payments to the mortgage lender? This route will not involve any tax.