What is Lifetime Tenancy and How Does It Work?

A lifetime tenancy is an agreement in which someone over the age of 60 has the right to live in their property until death. These agreements come with a significant discount on the property you're wishing to live in. The downside is that you do not own the property.

Are you looking to buy a property with a lifetime tenant in it? This article examines what a lifetime tenancy agreement is, the likelihood of obtaining a mortgage on a property with a lifetime tenant, and the varying perspectives of lenders.

How does a Lifetime Tenancy start up?

There are three options to consider with this type of agreement:

Council properties

Although far less common, ex-council properties may already have lifetime tenancies in place when being sold to a private landlord.

Mortgage company

The second is a lifetime mortgage, which is a later-life mortgage option, allowing an equity release company to draw up a lifetime tenancy agreement. In return, they would receive a significant equity stake in your property, or in some instances, full ownership.

Transfer of ownership

The final, which is the main focus of this article, is you transferring ownership of your property to a family member via a deed of gift. This means that the family member, typically your child, will have ownership of the property while you live in it as a lifetime tenant.

How difficult is it to evict a lifetime tenant?

Evicting a life tenant is complicated. A tenant can only be evicted by the landlord "if a court order is granted, and the court considers that it would be reasonable to grant possession." – Enfield GOV

Why would you buy a property with a Lifetime Tenant in it?

There are several benefits to buying a property with a lifetime tenant in it:

Lower costs

You’d buy a property with a lifetime tenant in it because it’s far cheaper than a standard property purchase. The discount at which the property would be sold would depend on factors such as whether the tenant is expected to pay rent. If they are, the discount would be significant compared to market rates. The age of the tenant would also be a factor.

Properties are sold comparatively cheaply due to the inability to take complete control of the property until the sitting tenant vacates. This timeframe is unknown, as you don’t know how long the tenant will live. The younger the tenant, the greater the discount is likely to be.

Great investment opportunity

Most professional investors consider purchasing properties with a life tenant in them as a medium- to long-term investment. Over time, prices on houses generally increase, meaning you’re going to get a good return on your investment.

With life tenancies, investors often secure a more reliable tenant, who is responsible for property maintenance. Additionally, investors will be getting a tenant who will benefit from low costs and a property better suited to their needs.

Stamp Duty Land Tax

Life tenancies are exempt from the higher rate (+3%) Stamp Duty Land Tax (SDLT). You will only have to pay the standard rate SDLT if your investment exceeds £125,000.

Are lenders likely to grant you a mortgage to buy a property which involves a lifetime tenant?

Most lenders won’t grant you a mortgage to buy a property with a lifetime tenant involved. Most buyers in this market are cash buyers. According to one expert mortgage broker we spoke to, lenders view lifetime tenants as having “too much power”.

The standard mortgage market, whether residential, buy-to-let, or commercial, operates by borrowers paying a percentage deposit and then making regular monthly payments to repay the entire borrowed sum over a fixed period, taking into account the prevailing interest charges imposed on top.

In the case of a lifetime tenancy, these can vary greatly; however, many don't involve the life tenant having to pay any rent at all. Those that do involve rent, as previously stated, most often have the rent significantly reduced from prevailing market rates. That means that a lender - or indeed the would-be investor - cannot expect to receive even a maintenance level of cash flow if the occupant remains in residence/stays alive.

Necessary alterations might lessen eventual returns

As people age, their homes often require adjustments. People typically install stairlifts to assist when they become too immobile. When visiting the upper floor is no longer an option, a ground-floor wet room is a good example of those adjustments.

When such an occupant dies, the investor, unless they can find a buyer who can make use of the arrangement, will most likely have to redesign the property completely, spending large sums to do so, which must be subtracted from any returns to the long-term investment. This is yet another reason which makes lenders very sceptical about lending to potential buyers of these properties.

How can Lifetime Tenancies and Concessionary Purchases successfully mix?

Purchasing a property with a pre-existing lifetime tenancy is uncommon. However, elderly people selling their home via a concessionary purchase while still living in the property does happen.

Concessionary purchases usually involve a relative selling their home to a younger relative. For example, a parent sells their house to their child at a considerable discount.

A lender would not normally allow an arrangement whereby they lend a mortgage to a borrower who is a lifetime tenant. After all, should the borrower default on repayments, the lender might find it virtually impossible to repossess the property from the lifetime tenant.

There are a couple of options to consider as a lifetime tenant when it comes to selling your house to a relative or gifting it.

Deed of Gift

Ownership of the property changes from one person to another with zero consideration. This is done by a type of transfer equity known as a Deed of Gift. Typically, this occurs when, for example, a parent wants to gift their child their property while they are still living in it. The recipient of the property will be added to the property’s title at the HM Land Registry.

Land Registry will require the property owner to sign both TR1 and AP1 forms before the property can be transferred. If the owner is acting without legal representation, then an ID1 form must also be submitted.

The process often requires taking independent legal advice because, given the dangers of pressure, the original property owner must clearly be acting of their own free will.

Concessionary purchase

In this instance, a concessionary purchase is when you purchase a property from a family member, typically a parent, for a considerably lower price. This works differently from a deed of gift if there's a mortgage involved. Let's say your parents' property is worth £250,000, and you're purchasing it for £200,000. Lenders could consider the £50,000 difference as the deposit for the mortgage.

Inheritance Tax on a Deed of Gift

Inheritance tax is a factor between three and seven years before your death. The amount of payable tax depends on the length of time between the gift and your death.

This is known as taper relief, which can significantly reduce the tax on a gift if the person making the gift dies between three and seven years prior. According to GOV, “Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.”

Here is the tax rate that would be applied:

Length Between Gift and Death	Tax Rate
Length Between Gift and Death Before 3 years	Tax Rate 40%
Length Between Gift and Death 3 to 4 years	Tax Rate 32%
Length Between Gift and Death 4 to 5 years	Tax Rate 24%
Length Between Gift and Death 5 to 6 years	Tax Rate 16%
Length Between Gift and Death 6 to 7 years	Tax Rate 8%
Length Between Gift and Death 7 years or more	Tax Rate 0%

What are the costs of a lifetime tenancy agreement?

This very much depends on the circumstances of the transfer. Typically, lifetime tenancies are drafted to reflect the wishes of the transferor or seller. As with many legal documents, a free PDF is available to download. However, these are not the most robust and will struggle to hold up in court. If you're looking to draft an agreement, contact us for a quote.