Option to sell 50% of property to friend

I own a property that's worth €250k. There's around €220k owed on it. The mortgage is at ECB + 0.5% and there are 20 years left on it. I don't need to sell it.

A friend has offered me €140k for 50% of the property. He'll pay me €40k upfront and then the other €100k over the remainder of my existing mortgage term but at the equivalent of ECB + 4.15%. I've run the numbers and he'd be paying me circa €150k over the next 20 years.

The notional interest won't be taxable for me and I won't lose my tracker mortgage on the basis of the way the deal would be structured.

Is this a good deal for me? I think it is. Everything would be covered off (e.g. death, disputes, etc).

Many thanks.

Is your friends name going on the property or what is his security. From the brief amount of information you give I would not see it as that good of a deal. Is this property generating income. Hope your agreements are as good as you stated

No, my name will stay on the property - This will be a side deal, but a tax compliant one.

Yes, it yields around 6% at €250k.

Gordon Gekko said:

No, my name will stay on the property - This will be a side deal, but a tax compliant one.

Yes, it yields around 6% at €250k.

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I don't see how you can say it's a tax compliant one unless you declare the interest he's paying you, and pay the tax on it...

If you sell part of the house now, you will have to pay CGT on it if appropriate.

Gordon Gekko said:

A friend has offered me €140k for 50% of the property. He'll pay me €40k upfront and then the other €100k over the remainder of my existing mortgage term but at the equivalent of ECB + 4.15%. I

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I don't understand what you mean.
Is it that he gives you €140k now.
You lend him €100k at 4.15%?

Is it a Buy to Let? If so, this will be extraordinarily complex.

If you don't need to sell, then you should not enter into this agreement.

Joint mortgages lead to so many problems that I would recommend them only if there is no other option.

Brendan

Ok so you have the option of selling 50% of an asset worth €250k for €140k. You can then "invest" €100k of this at 4.3%.

Initially if we take the view that everything stays the same over the term of the mortgage then over the next 20 years the 50% share will yield €150k in rent, cost about €7k in interest and be worth €125k.

If you sell the 50% then the €100k "investment" will yield approx €50k in interest. What income can you earn from the €40k and monthly capital repayments from your friend? But let's say you have €140k on deposit at modest rates of return.

So the key question is what do you think the rent will be over the next 20 years and what will the value of the property in 20 years?

Brendan Burgess said:

If you sell part of the house now, you will have to pay CGT on it if appropriate.



I don't understand what you mean.
Is it that he gives you €140k now.
You lend him €100k at 4.15%?

Is it a Buy to Let? If so, this will be extraordinarily complex.

If you don't need to sell, then you should not enter into this agreement.

Joint mortgages lead to so many problems that I would recommend them only if there is no other option.

Brendan

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Hi Brendan

CGT won't arise.

He'll give me €40k now and €150k over the next 20 years (monthly).

Gordon Gekko said:

Hi Brendan

CGT won't arise.

He'll give me €40k now and €150k over the next 20 years (monthly).

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Why would CGT not arise? The disposal for CGT purposes will be when you enter into the agreement, which is now. Deferred consideration doesn't defer the liability.

Jon Snow said:

Why would CGT not arise? The disposal for CGT purposes will be when you enter into the agreement, which is now. Deferred consideration doesn't defer the liability.

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Because there's no capital gain.

Ahhhh, I see.

The interest, such as it is, will be taxable as income in your hands though.

No it won't because it's not interest - It's an adjusted purchase price and deferred consideration.

Pure CGT territory.

What?

Gordon Gekko said:

No it won't because it's not interest - It's an adjusted purchase price and deferred consideration.

Pure CGT territory.

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No, sure you referred to the imputed interest rate in your OP!!

If he gives you 150k for and asset worth 125k, the difference is something other than the purchase consideration - looking at the facts (payment over an extended period) it is consistent with interest. If he gave you 150k upfront it'd be likely the difference would be a gift.

Jon Snow said:

No, sure you referred to the imputed interest rate in your OP!!

If he gives you 150k for and asset worth 125k, the difference is something other than the purchase consideration - looking at the facts (payment over an extended period) it is consistent with interest. If he gave you 150k upfront it'd be likely the difference would be a gift.

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Not at all - Plenty of deals with staged payments reflect the time value of money and don't constitute interest income.

It is not a gift and market value deeming etc is irrelevant as this is arms length between non connected parties.

How I choose to calculate what I want for a share in the property is irrelevant (e.g. by imputing interest) - The buyer said he can give me a lump sum and the balance over a number of years and if I want X, then that's the capital sum.

It really is a crazy project - especially as you don't need to do it.

You will have to transfer ownership to him at the outset and then what happens if he doesn't pay?

You will have great fun explaining it to the tax inspector.

He will have great fun calculating his gain for CGT purposes.

Brendan

Brendan Burgess said:

It really is a crazy project - especially as you don't need to do it.

You will have to transfer ownership to him at the outset and then what happens if he doesn't pay?

You will have great fun explaining it to the tax inspector.

He will have great fun calculating his gain for CGT purposes.

Brendan

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Thanks for replying.

Because of my background, I'm genuinely comfortable with the tax aspects. My friend would actually be out on a more of a limb. It's really the commercials that I'm concerned about, but I accept that people like to (and should) interrogate the other aspects.

I'm coming down in favour of not doing it in any event because it's a decent investment which I don't need to sell. I would have just taken the proceeds and diversified. I'll have a long hard think about it.

Thanks to everyone for their help.

Gordon Gekko said:

Not at all - Plenty of deals with staged payments reflect the time value of money and don't constitute interest income.

It is not a gift and market value deeming etc is irrelevant as this is arms length between non connected parties.

How I choose to calculate what I want for a share in the property is irrelevant (e.g. by imputing interest) - The buyer said he can give me a lump sum and the balance over a number of years and if I want X, then that's the capital sum.

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I'm intrigued, are you saying that you can sell the 50% interest for €140,000 and get €190,000 for it and not pay tax on the difference?

Joe_90 said:

I'm intrigued, are you saying that you can sell the 50% interest for €140,000 and get €190,000 for it and not pay tax on the difference?

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No, I'm saying that for CGT purposes I can sell a 50% interest for €190k.

We are unconnected parties and it's a bargain at arms length.

The imputed interest etc is just a way for me to work out what I might charge him (i.e. how I might arrive at "fair" consideration).

It would be normal for a transaction that's paid in instalments to have a higher value than one that's paid upfront...time value of money etc. It's still CGT territory.

The way I would look at this is that the purchaser is paying you a deposit for 50% of the property and is paying the rest in instalments.

Would the deposit and the instalment payments not be treated as trading receipts?

Sophrosyne said:

The way I would look at this is that the purchaser is paying you a deposit for 50% of the property and is paying the rest in instalments.

Would the deposit and the instalment payments not be treated as trading receipts?

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Why would they be trading receipts, unless OP is a property developer trading in property (which he clearly isn't).

Gordon, maybe I'm missing something here: you've said he'll be paying you an amount equivalent to 100k at ECB +4.15% over X number of years.

From this I'm assuming the amount will vary according with the ECB rate? If so, then you're dealing with a situation where either the consideration cannot be valued (and so s.547 market value rules apply), or only the 100k is seen as the capital value and the balance is (quite properly) interest. Which it is would depend on what the written agreement looks like.

Alternatively, maybe you're saying that you're fixing the amount payable now, upfront, based on the current ECB rate plus 4.15%, and therefore fixing the deferred consideration. In which case you'd better hope for low inflation & interest rates over the next 20 years to avoid the value of your position being eroded.