Renting to family - slightly complicated

luckyrunsofar

So the situation is as follows

- House for sale, buying on a private mortgage with details and interest rates to be decided (100k, I have 25% deposit) but will likely be interest only and around 4% for the life of mortgage, the equity being paid off is yet to be decided (maybe gifting?)

- A close family member will move in and pay me rent. This is likely to be with housing benefit, if not at first, then eventually.

- I am a 40% taxpayer.

- I know the seller, and we want to be as tax efficient as possible (while remaning completely legal, of course) in terms of CGT, income tax, etc.

I have the following questions.

What are the things to watch out for, when renting to family? I am aware that a formal agreement and paperwork will be required.

For CGT, how is the current market value of the house calculated by HMRC? The house has been owned since 1980, and they think over £30k has been used for improvements over the years, but do not have any receipts for this anymore. If they spend 10k renovating before selling, this can be deducted from the taxable amount, but presumably this will increase the valuation (depending on how they do this).

If my close relative is claiming housing benefit and the rent is below this, I read that they are able to keep the difference up to £15 a week. Could they gift this to me, so that I dont have to pay 40% tax on it? Is this avoidance or evasion, or in a grey area? This is not a contrived tenancy - they need to move somewhere and claim LHA regardless, and rent will be due (and arrears payable), regardless.

Is the tax deduction on the interest on a private mortgage the same as on a normal mortgage? Assuming the paperwork is drawn up etc.

I have my own normal mortgage of 140k on house value of 150k. Am I able to offset (some of ) the interest on this mortgage? Or would I have to pay off some of the mortgage, then remortgage to raise finance for the deposit (for example). Theoretical, as unlikely to happen in todays climate.

Thanks all.

N79

Since you know that you will be letting the property you can not purchase it on a residential mortgage - that would be mortgage fraud.

socrates

N79 wrote: »

Since you know that you will be letting the property you can not purchase it on a residential mortgage - that would be mortgage fraud.

Ditto!!!!!!!

luckyrunsofar

Not following. The mortgage will be from a private individual.

Do you mean that I cannot use my existing, residential mortgage to raise capital for a BTL property?

N79

Fair enough. Most posters on here hopelessly muddle terminology so I read a private mortgage to mean a residential mortgage.

You can raise the existing capital on your current residential mortgage subject to the mortgage company agreeing to the advance.

N79

luckyrunsofar wrote: »

I have the following questions.

What are the things to watch out for, when renting to family? I am aware that a formal agreement and paperwork will be required.

Nothing special, provide it is treated as a normal tenancy, but if it goes wrong then it can cause bad blood in the family for generations.

For CGT, how is the current market value of the house calculated by HMRC? The house has been owned since 1980, and they think over £30k has been used for improvements over the years, but do not have any receipts for this anymore. If they spend 10k renovating before selling, this can be deducted from the taxable amount, but presumably this will increase the valuation (depending on how they do this).

Each current owner will also have an annual personal allowance which can be offset from the sale price. See HMRC for details.

If my close relative is claiming housing benefit and the rent is below this, I read that they are able to keep the difference up to £15 a week. Could they gift this to me, so that I dont have to pay 40% tax on it?

No - you must pay tax on the full rent. If you declare a lower rent to the council than you collect then this is fraud (albeit on the part of the T as well as you).

Is this avoidance or evasion, or in a grey area?

Evasion

This is not a contrived tenancy - they need to move somewhere and claim LHA regardless, and rent will be due (and arrears payable), regardless.

Is the tax deduction on the interest on a private mortgage the same as on a normal mortgage? Assuming the paperwork is drawn up etc.

Yes

I have my own normal mortgage of 140k on house value of 150k. Am I able to offset (some of ) the interest on this mortgage? Or would I have to pay off some of the mortgage, then remortgage to raise finance for the deposit (for example). Theoretical, as unlikely to happen in todays climate.

If you take on new borrowing to finance the BTL then the interest can be offset against tax, irrespective of where you secure the borrowing. However, it sounds like you are not talking about new borrowing hence no offset can be made.

Thanks all.

Hope this helps.

pixie1

I could be wrong but i didnt think you could claim LHA when renting from a family member.

Good luck

Pix

socrates

pixie1 wrote: »

I could be wrong but i didnt think you could claim LHA when renting from a family member.

Good luck

Pix

Yes you can - this has been covered many times on the Benefits Board

N79

Yes you can so long as it is not a contrived tenancy.

I must admit that I think that the OP is going to have some persuading to do as their situation sounds rather contrived to me....

socrates

luckyrunsofar wrote: »

Not following. The mortgage will be from a private individual.

Do you mean that I cannot use my existing, residential mortgage to raise capital for a BTL property?

You say your existing mortgage is £140k and the value is £150k - where was you expecting to raise capital from?

BTL mortgage will require 25-30% deposit - do you have this - have you looked at the fees involved (solicitors, arrangement fees) the interest rate, the yield etc?

Is the wiring up to standard, the boiler - will it pass a gas safety inspection?

Does it all stack up?

Not wanting to be negative - but there are a few other things besides this - just giving you the heads up...

tbs624

luckyrunsofar wrote: »

- A close family member will move in and pay me rent. This is likely to be with housing benefit, if not at first, then eventually...

So how close is this family member, how will they pay the rent at the start of the tenancy, and how do you know that they will definitely qualify for LHA later on?

luckyrunsofar wrote: »

............If my close relative is claiming housing benefit and the rent is below this, I read that they are able to keep the difference up to £15 a week. Could they gift this to me, so that I dont have to pay 40% tax on it? Is this avoidance or evasion, or in a grey area?

Are you having a laugh? Sounds to me like you are trying to set an artificially low rent figure and then receive additional rental income without having to declare it. People seeking to screw over the benefit /tax system in this way make me :mad: You obviously care a great deal for your "close family member" if you'd be prepared to take advantage of his/her benefit payments in this manner.

luckyrunsofar wrote: »

This is not a contrived tenancy - they need to move somewhere and claim LHA regardless, and rent will be due (and arrears payable), regardless.

It is not up to you to decide whether or not the tenancy is a contrived one - you and your potential T would be advised of the official view when any application for LHA is made.