What are the tax implications on rent home to parents

money_issues

Hi, It the first time I am using this and need some advise urgently. I have just rcvd a letter from HM Revenue & Customs from the local compliance Hidden Economy stating that I may have rcvd income from property that I have let.
I am not sure how or why this has come as I do not own a home.
The only thing I can think of is the following:-
I bought the family home from my parents years ago to get them out of high interest payments and 2nd morgages. They still lived in the property and paid the morgage. They are pensioners so claimed housing benefit but I had to act as their landlord. I did not rcv any of the monies as they paid the morgage. The house was not bought from them for financial gain.
we sold the family home early last year in which they rcvd the monies for the home.
This letter has come out of the blue and not sure why but can only put it down to them claim housing benefit for a property which I acted, on paper, as landlord. I have not made any profit from letting the house as the housing benefit paid toward the morgage, if not covered it at the time.
I wasnt aware that I had to declare this to HM Customs.
What do I do? Will I be liable for tax on monies that I have not rcvd or made profit from?
I am employed and pay tax and worried that I am going to end up with tax implications or owing monies back to the tax man.
Again I wasnt aware that you had to notify the tax man as I wasnt not making any income from it so I am a little worried as you can imgaine. I thought I was helping my parents out and may have back fired on me.
HELP!!!

Renovatio

Hi,

If you owned the house then in the eyes of HMR&C the money that paid the mortgage was rental income that you received.

Ideally, you should have completed a tax return but the absolute basics are:

interest on mortgage+buildings/contents insurance+maintenance-rental income

This will give you a ball park figure for a profit or loss each year; from what you have said it sounds like it is more likely to be a loss. If it is a loss you will not be able to claim a tax refund, but at least you will not owe anything.

On another note, depending on whether you are in england or scotland i believe there are rules against claiming housing benefit to pay rent to a member of your family; you should seek some further advice on that matter!

Finally, if you owned another house at the same time you may have some capital gains issues to deal with; even though the proceeds went to your parent.

You really need to seek some professional financial advise as your situation is quite complex.

chewmylegoff

money_issues wrote: »

Hi, It the first time I am using this and need some advise urgently. I have just rcvd a letter from HM Revenue & Customs from the local compliance Hidden Economy stating that I may have rcvd income from property that I have let.
I am not sure how or why this has come as I do not own a home.
The only thing I can think of is the following:-
I bought the family home from my parents years ago to get them out of high interest payments and 2nd morgages. They still lived in the property and paid the morgage. They are pensioners so claimed housing benefit but I had to act as their landlord. I did not rcv any of the monies as they paid the morgage. The house was not bought from them for financial gain.
we sold the family home early last year in which they rcvd the monies for the home.
This letter has come out of the blue and not sure why but can only put it down to them claim housing benefit for a property which I acted, on paper, as landlord. I have not made any profit from letting the house as the housing benefit paid toward the morgage, if not covered it at the time.
I wasnt aware that I had to declare this to HM Customs.
What do I do? Will I be liable for tax on monies that I have not rcvd or made profit from?
I am employed and pay tax and worried that I am going to end up with tax implications or owing monies back to the tax man.
Again I wasnt aware that you had to notify the tax man as I wasnt not making any income from it so I am a little worried as you can imgaine. I thought I was helping my parents out and may have back fired on me.
HELP!!!

so you bought the house from your parents. your parents used to proceeds of the sale to pay off their mortgage.

after that, the mortgage was in your name, they claimed housing benefit and used it to pay the mortgage that was in your name?

you need professional advice. there are a couple of issues here:

i) income tax - the amount your parents have claimed in benefit and used to pay off the mortgage in your name sounds like taxable income to me. you may (stress, may) be able to offset the mortgage interest against it, but not any capital payments.

ii) capital gains tax - any increase in value from the price you paid your parents for the house to the price it was eventually sold for may be liable to capital gains tax

iii) were your parents entitled to claim the housing benefit - if this was a scheme specifically designed to enable your parents to claim housing benefit when they would not otherwise have been entitled to it (i.e. i don't think you can claim housing benefit to cover your own mortgage payments) then it may be that they were not entitled to the benefits. i have no idea what the position would be, but i can see this being an issue that needs to be scoped out.

you can get a free half hour with a solicitor to start the ball rolling - that may help, but you need tax advice really.

Poppy9

I am confused. Can you clarify:

• You bought your parents house off them and they used the money to pay off their mortgage. Assume you paid only the value of the mortgage not the value of the house if they were different.
• You funded your purchase via your own mortgage
• Your parents paid your mortgage for you
• You sold the house, repaid the mortgage and the remainder of the money you gave to your parents.

Housing benefit can only be claimed by your parents if they have a proper tenancy agreement and pay rent. Did you have a tenancy agreement in place which specified the payment of rent? If not your parents might find themselves liable for benefit fraud and have to repay it.

Did you continue to live in the house with your parents or did you live elsewhere? If you lived with them then they cannot be your tenants and cannot claim HB.

Re IR. Yes you have a tax liability plus a capital gains liability on the sale if you did not live in the house.

You need to draw up your costs that you incurred. You can only claim for what you paid as the IR may request copies of bills etc.

If you paid you can claim:

1. Mortgage
2. Buildings/contents insurance (if your parents paid and policies in their name then you cannot claim these)
3. Maintenance/improvement. Providing you have bills for the address of the house you owned it shouldn't matter that if they addressed to your parents. The IR might ask you to prove you paid/reimbursed your parents for these bills though.

The income you declare is rental income (or in your case the amount they paid each month for the mortgage).

If there was a surplus on the mortgage after the sale of the house you will also be taxed on this. The fact that you have "gifted" it to your parents will not reduce your liability.

I'm surprised your solicitor didn't warn you of the implications when you bought the house off your parents.

silvercar

Income tax: Apart from any penalty for not declaring the income, it sounds like you haven't made a profit (as the rental income covered the mortgage interest) so there won't be a further tax liability.

CGT: 2 scenarios:

firstly, the property was in your name but they held the beneficial interest. You could argue that you did this so that they could obtain a mortgage at reasonable rates. This would all wash except that they claimed HB. The claim means that they have publically declared that they are renting not owners and so they can't now claim to have been the beneficial owners without admitting to benefit fraud.

secondly, you bought the family home, they were your tenants. Presumeably you allowed them to pay a low rent as you only needed the mortgage paid. In working out the capital gains, you normally start with the market value (for transactions where the parties are related). In your case you need to reduce this because you bought it with tenants, to whom you gave a right to remain, at a rent below market rent.

If you want an idea of the tax bill, you need to post the property value at the time it was transferred into your name and the date of transfer and the date of sale and price achieved.

The bottom line is that some of the monies you gave to your parents (and gifts are allowed so no problem there) you should have reserved to pay the taxman.

As you helped your parents by doing this transaction, hopefully they will now give you the money back to pay the tax bill.

money_issues

HI all for the replies. I will see if I can make it a little clearer

I bought home from parents with my own morgage. They paid of theirs.
They still lived in the house and myself for a while.
I moved out
My parents still lived there but then my parents retired so I ended up paying the morgage for a while so in fact my parents where living there rent free for a period. I then could not afford to pay it all as I had my own place which I was renting. They then claimed Housing Benefit to assist them in paying towards the house which was in my name i.e. I was acting as a landlord.
We sold the home in which I received the monies as the morgage was in my name but gave the money to my parents.
I only bought the home from them to enable them to pay their morgage off / 2nd morgage.
Does this shed any more light on the situation?
Please help

poppysarah

I think you need some serious professional advice. All sounds increasingly dodgy and you need to get it all sorted out.

Poppy9

Assuming your mortgage wasn't a buy to let mortgage either?

silvercar

Poppy9 wrote: »

Assuming your mortgage wasn't a buy to let mortgage either?

Wouldn't need to be if initially OP was also living there.

I bought home from parents with my own morgage. They paid of theirs.Explain. You can't have 2 mortgages on one home.
They still lived in the house and myself for a while.Very good news, reduces your CGT liaibility.
I moved out
My parents still lived there but then my parents retired so I ended up paying the morgage for a while so in fact my parents where living there rent free for a period. I then could not afford to pay it all as I had my own place which I was renting. They then claimed Housing Benefit to assist them in paying towards the house which was in my name i.e. I was acting as a landlord.OK so they claimed HB to pay their rent, which you used to pay the mortgage.
We sold the home in which I received the monies as the morgage was in my name but gave the money to my parents. Some of it wasn't your to give, it may have been due to the taxman.
I only bought the home from them to enable them to pay their morgage off / 2nd morgage.
Does this shed any more light on the situation? If you can explain the 2 mortgage bit, it starts to make sense.
Please help The more information you can give the better, the dates you lived there would be a starting point to establish how much exemption from CGT you have.

Living in the home (as your only home) gives you exemption for the time it was your home and the last 3 years of ownership. It only entitles you to lettings relief, so could reduce or even erradicate your CGT liability.

money_issues

Hi

In reference to the morgage only 1 morgage was remaining on the house which was mine.

silvercar

Let me see if I have got it right.

At some point, you took ownership of the family home. At this point it is your principal private residence (PPR). You moved out at a later date, so you would get relief from CGT for the time it was your PPR and the last 3 years of ownership. You also get letting relief as you let something that was your PPR. This can knock upto 40k off the CGT liability.

If the sale was before 5 April 2008, your CGT calculation is based on the old rules which would give you relief depending how long you have owned it, called taper relief.