If you are a homeowner struggling with the responsibilities associated with managing a property - such as maintenance or mortgage repayments - you might be considering a move to rental accommodation.
Of course, if you are happy in your current home, you may be wondering whether you can pass ownership of your existing property to another party and rent it directly from them.
In this way, you would theoretically be allowed to stay in the same place while someone else takes over all of the main financial and practical responsibilities linked to ownership of the home.
So, is this possible? In this article, we explore a number of ways in which this may be done - including Sale and Rent Back schemes and their legal implications.
We’ll also look into private means by which you could be legally permitted to stay in your home as a tenant rather than an owner, as well as discussing alternative ways to escape mortgage debt and potential repossession.
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So, what does “Sale and Rent Back” - otherwise known as “Sale and Lease Back” or “Seller Rent Back” - actually mean?
This name is fairly literal. Sale and Rent Back refers to a process whereby the homeowner first sells their property to a third party - usually a specialist home buying organisation.
At this point, the seller signs a tenancy agreement with the organisation acting as the buyer, so that they may rent the same property from that company in order to remain a resident.
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So, how does “Seller Rent Back” work exactly?
Well, at present, it doesn’t. This particular niche of the property industry was effectively brought to a halt in 2011 following an in-depth review into its practices by the Financial Services Authority (now the Financial Conduct Authority or FCA).
To find out why this happened, we should first explain a little of the recent history of Sale and Rent Back
Sale and Rent Back (SRB) companies were entirely unregulated up until 2009. However, this particular sector of the property industry was quickly growing in notoriety.
The practice’s increasingly poor reputation was due in no small part to the rise in prevalence
of numerous dubious methods - many of which amounted to scams.
These approaches were often employed by unscrupulous firms whose main intention appeared to be the hoodwinking and exploitation of homeowners in financial distress.
As a result of these apparent problems, the Office of Fair Trading (OFT) launched a study into the industry in 2008. This concluded the same year, and found a number of serious failings - leading to a recommendation of FSA (now FCA) oversight within the sector.
HM Treasury began to oversee the industry in 2009, with this jurisdiction passing to the FSA in 2010. From this point, any organisation or scheme offering Sale and Rent Back had to be registered with - and therefore regulated by - the FSA.
This requirement remained in place up until 2011/12, where a review found that “the majority of SRB sales were either unaffordable or inappropriate”.
To this end, new regulations were introduced - including a fundamental requirement for sellers to demonstrate clearly, and in a manner that was provable beyond doubt, that they were facing the repossession of their property and that they had been refused help by their mortgage lender.
SRB companies could now only register with the FSA if they met this requirement indisputably. When the FSA became the FCA in 2013, this legislation was upheld.
The aforementioned criteria, along with other strict conditions and significant levels of scrutiny from the FCA and other financial regulators, means that, in reality, no SRB firms have been able to practice legally since these changes came into force.
To this end, if you have been offered SRB services by a homebuying organisation or property investor, you need to tread very carefully - as the chances are that the company in question is not operating legally.
You can check the status of any firm of this kind by searching for them in the FCA’s register.
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To many of the users of SRB schemes, selling their home in order to become a tenant in the same property seemed a sensible tactic.
Should they be successful in selling their property and remaining there as a tenant, they would not have to leave a place in which they were comfortable and settled while being able to free themselves from mortgage arrears and maintenance costs in an apparently fuss-free manner.
In addition, practical matters such as school catchment areas and commutes to work or to medical appointments would remain unchanged.
What’s more, becoming a tenant would usually grant an individual faster recourse to welfare support - such as unemployment and housing benefit - than they might have achieved as a homeowner.
The FCA’s review discovered the following problems with a large number of SRB schemes that were offered prior to the change in regulation in 2011/12:
Many unscrupulous organisations made false promises - with one of the most common being that the home’s previous owners could stay on as tenants indefinitely
The buyer would offer way below market value for the property and then charge the standard local rent to make a larger profit
Some companies would defraud mortgage lenders by applying for a Buy to Let mortgage
without revealing that the current owner would then become the tenant
They would even inflate the property price in order to achieve a deposit-free sale, then refinance and syphon more money out of the property
As is the case with many fraudulent home buying schemes, some organisations would lower their offer dramatically shortly before the sale completed, trapping the seller into the transaction and keeping the difference
After buying the property, some companies provided only short fixed-term tenancy agreements, then refused to renew and evicted the residents - sometimes with the aim of selling the property for a profit
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At present, according to the FCA register, it appears that no organisation in the UK is officially offering Sale and Rent Back as a service.
However, technically, the practice remains legal but heavily regulated. In their review, the FCA (then FSA) states that “the market for regulated SRB has in effect been temporarily halted” due to a lack of firms that meet the criteria allowing them to continue to offer this option.
As we mentioned earlier, this means that if you happen upon a company that offers SRB to the general public, they are likely to be doing so without the permission or regulation of the FCA.
To this end, it is worth undertaking plenty of research to ensure that you are not using an illegal service. If you are, you will not be able to rely upon the protection of the FCA or any other kind of financial services support should things go wrong.
Full details of the regulations and requirements introduced by the FSA/FCA are detailed in the body’s online handbook - specifically in the MCOB Mortgages and Home Finance: Conduct of Business sourcebook.
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A much more straightforward option may be to arrange a Sale and Rent Back agreement privately. Perhaps you have a friend or family member who would be willing to take on the ownership of your property and act as a landlord to enable you to stay on as a tenant.
In the right circumstances, this is absolutely possible - although renting a property from a family member may come with its own challenges.
As we have explained above, it’s currently almost impossible to find an organisation that offers SRB legally in the UK. But can you sell your house and rent it back in a private transaction with another individual rather than a business?
As a homeowner, you are able to sell your property to anyone you wish - and that person, in turn, is permitted to let that home to a tenant of their choosing - so the answer is yes.
In this way, you can avoid the pitfalls of using a potentially unregulated and illegal SRB company while retaining the option of keeping your property “in the family”.
Of course, when arranging to rent a house, flat, bungalow or any other type of home, it is always important to draw up an official agreement regarding your tenancy - no matter who is now in control of the property.
The specifics of this agreement will depend on your requirements, preferences and circumstances, along with those of the new owner.
The long and short of it is that you must create a watertight agreement that suits all parties involved as equally as possible. There are templates available online to which you may refer, but no matter your approach, you must ensure that the document adheres to current legislation.
It may be best to consult a legal specialist to make sure that you have not missed anything.
There are a range of different tenancy options available to choose from when drawing up your contract with your new landlord.
For example, you may decide on an Assured Shorthold Tenancy that is granted for a set period of time, such as 6 months, 12 months or 2 years. This is known as a fixed term tenancy agreement.
Alternatively, you may opt for a “rolling” contract, otherwise known as a periodic tenancy agreement. This is likely to be preferable for residents who wish to stay in the same property long-term as a tenant rather than a homeowner.
In a periodic tenancy, the landlord must give a pre-established amount of notice to the tenant if they wish to end the agreement - and vice versa if it is the tenant who wishes to terminate the arrangement. This provides protection to both parties as well as offering a long-term solution.
Entering into an agreement with a close friend or family member can often prove challenging, as tensions may run high when money is involved.
For this reason, making things official by putting your agreement in writing, following standard industry practice and making the contract legally enforceable can clarify things and make it easier to defend your rights.
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It is certainly not impossible for a buyer to acquire a Buy to Let mortgage when purchasing property from a family member in order to rent it back to them. However, most lenders are hesitant to agree to this kind of arrangement.
This is because many mortgage providers suspect that, when renting to a family member, a landlord may allow a little more “leeway” when it comes to paying rent punctually - and they may be tempted to give discounts, charging rent at far below the local average.
In the majority of cases, buy to let mortgage terms specifically stipulate that the property to which the loan applies cannot be let out to family members of the mortgage holder.
However, a small number of providers do allow renting to relatives.
It is important to clarify this point when applying for a mortgage, as if the mortgage holder goes on to let their property to a relative despite this being forbidden in the agreement, they will be in breach of their contract.
Depending on the surrounding circumstances, breaching a mortgage contract may lead to a fine, a higher ongoing repayment rate, a notice for immediate full repayment or even repossession.
It is worth noting that, usually, buy to let mortgage terms only refer to “immediate” relatives such as parents and children, grandparents and grandchildren and siblings - as well as spouses and civil partners.
This means that it is usually fairly simple to acquire a buy to let mortgage with the intention of letting property to a cousin, uncle, aunt or more distant relation.
While unregulated “family” buy to let mortgages do exist, these are only available if less than 40% of the property in question is to be occupied by a family member paying rent.
For this reason, if you intend to sell the property to a family member and then occupy it in its entirety as a tenant, this is unlikely to be the right kind of mortgage for your situation. Instead, a standard FCA-regulated product would be required.
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If you have outstanding mortgage payments on your property, or if you are in arrears with your lender, you may need to take certain actions as part of your private Sale and Rent Back arrangement.
The amount for which you are selling your property should be enough to cover any outstanding mortgage repayments and arrears.
Even if you wish to sell your property to a family member for below market value, you will need to have access to enough money to cover the remainder of the mortgage. After all, if you will be renting from hereon, you won’t be able to “port” your mortgage to any new property.
It is important to note that any difference between your chosen discounted sale amount and the property’s “fair market value” will constitute a “gift” in the eyes of HMRC - so there may be Inheritance Tax payable. We’ll look further into IHT later in this guide.
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If you wish to keep your property “in the family”, and if you would prefer to stay there and pay rent to its new owners, you might choose to give it to a relative as a “gift” and then rent it back.
Unless the intended recipient is a spouse or a civil partner, and/or unless your estate is worth less than the tax-free threshold of £325,000, giving a gift of this kind will likely incur an Inheritance Tax (IHT) charge.
However, IHT will not be charged if you live for more than seven years after giving the gift.
If you live for between 6 and 7 years after the Deed of Gift, tax will be payable at 8%. Between 5 and 6 years, it rises to 16%. Between 4 and 5 years it’s 24% and between 3 and 4 years it’s 32%. If you pass away within 3 years of the deed of gift, IHT is payable at 40%.
This system is known as “taper relief”.
Usually, IHT is payable by the estate of the deceased. However, if the combined value of the gifts given within the seven years preceding the donor’s was to exceed £325,000, IHT would be charged to the recipients.
The approach of transferring property to a family member via Deed of Gift - then renting from them - may also cause issues when it comes to your mortgage. This is because, if you still have a loan of this kind in place, it will usually need to be repaid before a new owner can take charge.
There are some circumstances in which it may be possible for you to transfer your mortgage into another person’s name. However, this depends on the type of loan you have, as many mortgage products do not allow this.
Some, on the other hand, may be compatible with this process. The steps involved in removing your name from the property’s mortgage and adding someone else’s can be achieved via Transfer of Equity.
The term “Transfer of Equity” refers to the act of legally adding names to - or removing them from - a property’s title deed on the Land Registry. Any action of this kind must be approved by the mortgage lender. You may be required to remortgage as part of this transfer, but not always.
Before your chosen family member can take on the mortgage repayments for your property, the lender will need to run a background check to ensure that this new individual has the financial means to do so.
These checks will most likely be the same as the ones you underwent when first applying for the loan.
In order to begin this process, it is likely that you will need to be up to date with your mortgage payments.
It is unlikely that you will be permitted to arrange an Equity Transfer if you are currently in arrears, so this approach may not be the answer for you if you are trying to move from homeownership to renting in order to clear your debts.
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If you wish to terminate your homeownership because of pressing financial struggles, you might consider an Assisted Voluntary Sale (AVS). This method could prove particularly helpful if your property is facing repossession due to non-payment of your mortgage.
You can arrange AVS through your lender, though not all providers offer this option - so it’s important to check. Those who do provide AVS will likely allow the owner to remain in the property for an amount of time that is deemed suitable to arrange a sale.
This helps the owner to avoid repossession and reduces the pressure on them to force through a rushed and potentially disadvantageous transaction.
In some cases, a mortgage lender may even offer an AVS which includes support regarding the fees and expenses that come with selling property. This can afford the seller a little more flexibility and breathing room.
For example, as a part of their terms, a particular provider may agree to a reduction in the homeowner’s monthly mortgage payments between the date they agree to an AVS and the date they are able to sell their home.
An Assisted Voluntary Sale is almost always a better option than handing over your keys and directly surrendering your property to the mortgage lender.
This is chiefly because it will give you more time to get everything in order - and will usually enable you to remain in charge of your sale from start to finish.
As a result, you may be able to achieve a better price than you might have if the lender had taken charge.
A free and no-obligation cash offer for your house
If you are concerned that your property will be repossessed because you are struggling to get out of mortgage arrears, or if you are finding it difficult to sell your home within the required timescale, a quick house sale company may be the answer.
Known by a range of other names, including “cash home buying companies” and “sell house fast firms”, organisations of this kind usually buy property directly from the owner for a cash sum - usually between 75% and 85% of the home’s market value.
A major benefit of this approach is speed. Sellers do not need to wait for buyers to express interest and the transaction will not be part of a chain.
As a result, some companies of this kind take as few as 7 - 21 days to complete. This means that mortgage debt will not have the opportunity to build up much further as the result of delays to the sale.
Because you won’t be selling on the open market, the chances of your transaction falling through are significantly reduced.
In addition, many companies offering a service of this kind do not charge agency fees up front, and most cover all solicitor expenses on the behalf of the seller.
Whatever the condition of your house, you’ll be able to find a fast home buying company that is willing to take it off your hands - which means you won’t have to renovate or redecorate in order to get the property into a “saleable” state.
A free and no-obligation cash offer for your house
If you wish to sell your property and begin renting instead, it’s important to make sure that you select the option that best suits your individual situation.
To help you determine the best course of action, it is a good idea to first seek independent financial advice.
You can request help from the debt charity StepChange - formerly the Consumer Credit Counselling Service - or via the Citizens Advice Bureau. A solicitor specialising in property law can advise you on what to do if you have been defrauded by a Sale and Rent Back scheme.
If you are interested in selling your home within 7 - 21 days for cash, all you need to do is to make contact with our team of experts.
We will complete a free “desktop valuation” of your property and make you a no obligation cash offer immediately.
To learn more about our services or to find out how we can sell your property fast, get in touch with us today.