Concessionary purchase: Explained

Put simply, it allows you to buy a property from family, often mum and dad, for less than the property’s current market value. It’s also called a transaction at under value.

But how does a concessionary purchase, otherwise known as a concessionary mortgage, work and how much of a deposit do you need?

How does it work?

Let’s say your mum has a property valued at £200,000, which you’d like to buy.

While you can afford the mortgage repayments, you would struggle to cover the funds needed for a deposit (a standard 10% deposit would require savings of £20,000).

In this case, your mum could help you by offering to sell the property for £150,000; the difference between the sale price and the market value of the property would act as the deposit.

You would then have to find a lender to grant you a mortgage loan for the £150,000.

Which relatives can offer you a concessionary purchase?

Most lenders will consider granting mortgages for concessionary purchases where the sellers are parents, brothers, sisters or grandparents.

Some lenders will even consider granting mortgages for concessionary purchases if the sellers are uncles, aunts, step-parents or cousins.

Most of these lenders will require you to put up a minimum 5 – 10% mortgage deposit from your own savings (which cannot be gifted by a relative) as security for the mortgage loan.

Pros

• You can pass on property to your children at a more affordable level.
• You can keep property within your family.
• You can transfer under the market value or for zero consideration; and (if required) there are many mortgage lenders who offer concessionary purchase mortgages.

Cons

• You need to inform your mortgage lender the property is being sold under market value. Failing to do so could mean the mortgage offer is rescinded or takes time to change.
• The gift may have an impact for inheritance tax purposes.
• The transaction could be voided if the party gifting the property undervalued is made bankrupt.

Is stamp duty paid on concessionary purchases?

If you’re a first-time buyer and have never owned a freehold, or have a leasehold interest in a residential property in the UK or abroad, you’re exempt from paying stamp duty, as long as you are purchasing a property at £500,000 or less.

If you’re not a first-time buyer, the best thing about concessionary purchase stamp duty is that it’s calculated on the sale price of the property, not the market value.

For example, if the market value of a property is £200,000 but it is sold to you for £170,000, the stamp duty on a concessionary purchase would be calculated from the £170,000.

Stamp duty is charged at 2% for properties between the value of £125,001 and £250,000, which means you would pay £3,400 in stamp duty.

Are my parents allowed to live in the property after the sale?

Not normally. Most lenders will expect the seller to move out when the sale is completed which is known as vacant possession.

You should also be aware that if your lender agrees to allow your relative to stay in the property, they may not allow you to build an annexe to house them.

This is just one of the reasons why it’s a very good idea to seek advice from an independent mortgage broker, who can accurately pinpoint which lenders might fit your particular needs.

Your lender should also be well-considered because the transaction normally involves close family members, for whom you should do all you can to keep potential stresses and mistakes to a minimum.

Can I get a concessionary mortgage with bad credit?

Depending on your circumstances, it’s possible. Types of bad credit could include:

• No credit history
• Low credit score
• Late payments
• Missed mortgage payments
• Defaults
• CCJs
• IVAs
• Debt Management Schemes
• Repossessions
• Bankruptcy

The good news is that “bad” credit is subjective, and there are many lenders offering mortgages to people even with severe and recent credit issues.

Some forms of credit, like a repossession or bankruptcy, are viewed as more severe while others including late payments and a low credit score are seen as more acceptable on a mortgage application.

Every lender has different conditions and uses varying criteria to assess someone’s risk and ability to repay their mortgage.

This means while one lender may reject you, another may have no problem approving your application.

What else impacts concessionary purchase mortgage eligibility?

Other factors that can affect your eligibility include:

Property type

Listed buildings are sometimes seen as riskier for lenders as they tend to be more difficult to sell on in the case of repossession.

Income

How much you earn can make a real difference. Lenders will need to be confident that you can afford your mortgage repayments.

Length of mortgage term

A standard mortgage term is 25 years, which means some lenders won’t provide a mortgage to elderly applicants, and borrowers wanting a mortgage over a shorter period of time will need to prove affordability.

Are the original owners liable to pay capital gains tax?

The original owner or owners are liable to capital gains tax on the sale proceeds if the dwelling is a second home.

Will a concessionary purchase be liable for inheritance tax?

Because the discount is a gift, it may be subject to inheritance tax, but only if the original owner or owners die within seven years of the concessionary purchase transaction.