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    • colman12
    • By colman12 16th Jun 17, 3:32 PM
    • 16Posts
    • 6Thanks
    colman12
    Rent from Mother in Law
    • #1
    • 16th Jun 17, 3:32 PM
    Rent from Mother in Law 16th Jun 17 at 3:32 PM
    Hi,

    Would like to run this past people on here:

    Wife and I about to buy a flat for our mother.

    Mother will pay rent (covering mortgage + ground rent etc) to us.

    Am I right to say, if we structured it that way the wife (lower rate tax payer / not likely to work in the future, looking after kids) owned 100% of the property, the "rental profit" from the flat would be taxed at her lower rate (or 0 if it all got used against personal allowance).

    We would also be protected when we came to sell it, as CGT would be levied at 18% rather than the higher rate

    Is my understanding correct?

    And don't worry about comments on the wife owning 100% of the property. That's fine.

    Thanks,
Page 1
    • G_M
    • By G_M 16th Jun 17, 3:38 PM
    • 42,313 Posts
    • 49,157 Thanks
    G_M
    • #2
    • 16th Jun 17, 3:38 PM
    • #2
    • 16th Jun 17, 3:38 PM
    I believe you arre right on both counts.
    • colman12
    • By colman12 16th Jun 17, 3:40 PM
    • 16 Posts
    • 6 Thanks
    colman12
    • #3
    • 16th Jun 17, 3:40 PM
    • #3
    • 16th Jun 17, 3:40 PM
    Great, thank you.
    • DumbMuscle
    • By DumbMuscle 16th Jun 17, 3:47 PM
    • 196 Posts
    • 290 Thanks
    DumbMuscle
    • #4
    • 16th Jun 17, 3:47 PM
    • #4
    • 16th Jun 17, 3:47 PM
    We would also be protected when we came to sell it, as CGT would be levied at 18% rather than the higher rate
    Originally posted by colman12
    Probably, unless you make a very large gain (~£40k)
    Depends how large the gain is! If the gain is larger than (capital gains allowance) + (basic rate income tax threshold) - (income for that tax year after deduction of income tax allowance), then you will pay higher rate (18%) on that excess. See https://www.gov.uk/capital-gains-tax/rates

    CGT allowance is currently £11,300. Basic rate threshold is currently £33,500 (not including the income tax allowance)
    • colman12
    • By colman12 16th Jun 17, 3:52 PM
    • 16 Posts
    • 6 Thanks
    colman12
    • #5
    • 16th Jun 17, 3:52 PM
    • #5
    • 16th Jun 17, 3:52 PM
    Thanks, CGT is secondary concern, as it is 30 years out probably.

    It isn't an "investment property", so not expected large capital gains.

    My idea is to shield myself from a higher tax liability by allocating the income against my wife's tax status.

    It is shame that renting to a family member is treated in this way but from what I have read, there is no difference between renting to a family member and renting to a stranger.

    The idea is to charge the "rent" to cover the mortgage + ground rent + service charge. Is there any risks around being seen to charge a "below the market" rent?

    This is an over 60's property, so in reality the market is restricted, so a "rent" from the flat would not be comparable to the average rental price in the area.
    • G_M
    • By G_M 16th Jun 17, 4:06 PM
    • 42,313 Posts
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    G_M
    • #6
    • 16th Jun 17, 4:06 PM
    • #6
    • 16th Jun 17, 4:06 PM
    I think charging below market rate only becomes an issue if the tenant claims benefits eg HB.

    No impact on income tax or CGT.

    Other possible issues to consider:

    * mortgage. Will need to be BTL, and maney lenders do not permit letting to family.
    * "over 60's property" Are you eligible to buy? Check the terms. Also these are often leasehold, or have covenants. Check carefully that letting is permitted (or perhaps requires consent).
    • colman12
    • By colman12 16th Jun 17, 4:13 PM
    • 16 Posts
    • 6 Thanks
    colman12
    • #7
    • 16th Jun 17, 4:13 PM
    • #7
    • 16th Jun 17, 4:13 PM
    Thanks for the other flags.

    The mother in law is currently working so can support the "rent". In time, and once she retires, if she can claim HB which can come to us, through rent, we could revise the rental charge to ensure it is "more alligned"

    Mortgage is fully under written. Consent to own the property has been obtained from the Freeholder, so all ok on that side.

    I don't think it is called a BTL, as you can't have a family member living there. This would be deemed a second residential mortgage.

    We are a matter of days away from exchange. But i thought about this issue on "renting" it to her. I think structure the ownership in this manner is the most efficient thing I can do.
    • 00ec25
    • By 00ec25 16th Jun 17, 4:17 PM
    • 5,571 Posts
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    00ec25
    • #8
    • 16th Jun 17, 4:17 PM
    • #8
    • 16th Jun 17, 4:17 PM
    My idea is to shield myself from a higher tax liability by allocating the income against my wife's tax status.
    Originally posted by colman12
    can i just caution against your use of language

    in order for your wife to have all of the income she must be the sole owner. In that case you are not "allocating" anything as it is not yours to allocate. I appreciate a married couple thinks and acts as "we", but not in the case of income tax on property rent!!!

    The idea is to charge the "rent" to cover the mortgage + ground rent + service charge. Is there any risks around being seen to charge a "below the market" rent?

    This is an over 60's property, so in reality the market is restricted, so a "rent" from the flat would not be comparable to the average rental price in the area.
    Originally posted by colman12
    the only technical restriction applicable where there is a below market rate rent is that she cannot claim a loss. The amount of costs she can claim are capped at the actual rent she received, and therefore the "best" she can do is have zero net tax liability.

    Naturally as she plans to charge rent equal to her costs that is going to be the outcome anyway.

    Is she funding the purchase with a mortgage?
    If yes then make sure she understands that any capital repayment element of the mortgage is not an eligible cost for her tax calculation, and therefore she may well end up with an income tax liability.

    Also note that if you are party to the mortgage, but are not an owner, then only her share of the mortgage interest can be claimed. Your share of the mortgage would not be claimable anywhere as you are not an owner of the rental property and therefore have no right to any income from it or costs to offset against it.
    • LilElvis
    • By LilElvis 16th Jun 17, 4:19 PM
    • 3,199 Posts
    • 8,856 Thanks
    LilElvis
    • #9
    • 16th Jun 17, 4:19 PM
    • #9
    • 16th Jun 17, 4:19 PM

    It isn't an "investment property", so not expected large capital gains.
    Originally posted by colman12
    You might be surprised. In the 12 years that my MIL has owned her 2 bedroom / 2 bathroom retirement flat they've gone from £500k to over £750k with none of them staying on the market for more than about a month.
    • 00ec25
    • By 00ec25 16th Jun 17, 4:22 PM
    • 5,571 Posts
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    00ec25
    The mother in law is currently working so can support the "rent". In time, and once she retires, if she can claim HB which can come to us, through rent, we could revise the rental charge to ensure it is "more alligned"
    Originally posted by colman12
    that would cause problems because you are varying the level of rent specifically and only because she is then claiming benefit. As such the benefit may (not will) be capped for obvious reasons, you intend manipulating the system for financial gain.

    the phrase used is "contrived tenancy"
    Mortgage is fully under written. Consent to own the property has been obtained from the Freeholder, so all ok on that side.

    I don't think it is called a BTL, as you can't have a family member living there. This would be deemed a second residential mortgage.

    We are a matter of days away from exchange. But i thought about this issue on "renting" it to her. I think structure the ownership in this manner is the most efficient thing I can do.
    Originally posted by colman12
    take note of what i posted above re who is party to the mortagge nad how that limits the costs that can be claimed.

    As a second residential mortgage it is I assume a repayment one (?) and therefore the capital component is not a tax cost, nor is your share of it.
    • DumbMuscle
    • By DumbMuscle 16th Jun 17, 4:24 PM
    • 196 Posts
    • 290 Thanks
    DumbMuscle
    Thanks for the other flags.

    The mother in law is currently working so can support the "rent". In time, and once she retires, if she can claim HB which can come to us, through rent, we could revise the rental charge to ensure it is "more alligned"

    Mortgage is fully under written. Consent to own the property has been obtained from the Freeholder, so all ok on that side.

    I don't think it is called a BTL, as you can't have a family member living there. This would be deemed a second residential mortgage.

    We are a matter of days away from exchange. But i thought about this issue on "renting" it to her. I think structure the ownership in this manner is the most efficient thing I can do.
    Originally posted by colman12
    So you have a mortgage offer, and the mortgage company is aware that you will not be living there and will be renting to your mother? Check the mortgage offer terms to make sure they cover your situation. At that point, what "type" of mortgage it is doesn't matter, and you're OK.


    A few minor questions, for which the answers aren't all that important so long as your wife and your MIL agree what they are.
    • What will happen to the rent once the mortgage is paid off?
    • What about when the mortgage payments/ground rent change (e.g. end of a fix)?
    • What about fees for remortgaging?
    • Will you give your MIL the option of overpaying to get the mortgage paid off sooner?
    • colman12
    • By colman12 16th Jun 17, 4:26 PM
    • 16 Posts
    • 6 Thanks
    colman12
    Zero tax liability is the desired outcome, or at least low, because as say you can only claim the interest element of the mortgage. Not trying to engineer losses.

    My thoughts are, and happy to receive corrections on this are:

    We opt to be tenants in common, which means we can specify the specific % of ownership of the property.

    If my wife owns 99% of the property, I would have thought £100 of rental income, would be allocated £99 to her and £1 to me and that would drive the tax obligations.

    The mortgage will sit with my wife and I, which is fully funded by the mother in law.
    • colman12
    • By colman12 16th Jun 17, 4:28 PM
    • 16 Posts
    • 6 Thanks
    colman12
    So you have a mortgage offer, and the mortgage company is aware that you will not be living there and will be renting to your mother? Check the mortgage offer terms to make sure they cover your situation. At that point, what "type" of mortgage it is doesn't matter, and you're OK.


    A few minor questions, for which the answers aren't all that important so long as your wife and your MIL agree what they are.
    • What will happen to the rent once the mortgage is paid off? - the rent would
    • What about when the mortgage payments/ground rent change (e.g. end of a fix)?
    • What about fees for remortgaging?
    • Will you give your MIL the option of overpaying to get the mortgage paid off sooner?
    Originally posted by DumbMuscle

    It is repayment, by the time the mortgage is repaid, the MIL would no longer be working and there would be no rent, as we would cover all of the costs.

    If we can overpay, we will. Any future remortgage fees will be covered by the family.
    • 00ec25
    • By 00ec25 16th Jun 17, 4:48 PM
    • 5,571 Posts
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    00ec25
    Zero tax liability is the desired outcome, or at least low, because as say you can only claim the interest element of the mortgage. Not trying to engineer losses.

    My thoughts are, and happy to receive corrections on this are:

    We opt to be tenants in common, which means we can specify the specific % of ownership of the property.

    If my wife owns 99% of the property, I would have thought £100 of rental income, would be allocated £99 to her and £1 to me and that would drive the tax obligations.

    The mortgage will sit with my wife and I, which is fully funded by the mother in law.
    Originally posted by colman12
    your thoughts are fine, TIC is the only way to go given your circumstances. 99/1 is then the "usual" way to do it.
    • G_M
    • By G_M 17th Jun 17, 12:45 PM
    • 42,313 Posts
    • 49,157 Thanks
    G_M
    I don't think it is called a BTL, as you can't have a family member living there. This would be deemed a second residential mortgage.

    We are a matter of days away from exchange. But i thought about this issue on "renting" it to her. I think structure the ownership in this manner is the most efficient thing I can do.
    Originally posted by colman12
    Don't want to flog a dead horse but...

    Is the lender aware you will not be using this as a 2nd home, but letting it to a family member (in return for rent)?

    If yes, fine. But if they are assuming it's a 2nd home (as " second residential mortgage" implies) then you may well be in breach of your mortgage terms.

    Insurers also will need to be aware of the distinction.
    • Mojisola
    • By Mojisola 17th Jun 17, 12:54 PM
    • 28,644 Posts
    • 72,972 Thanks
    Mojisola
    Have you worked out what would happen to the property (and the arrangement with MIL) if the two of you die before her?
    • colman12
    • By colman12 19th Jun 17, 9:20 AM
    • 16 Posts
    • 6 Thanks
    colman12
    Lender is aware, as we have to get occupier consent forms signed etc. Solicitor is fully aware that we purchasing this property with the sole purpose of my MIL living in it.

    We will have life insurance to clear the mortgage in the event that both of us die.

    Thanks for all the useful thoughts and questions.
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