Income tax?

Ameliajane2011

Hi Everyone,

I posted a message on Friday and received lots of helpful replies so am hoping that I can get some more now!

My parents are going to be helping us buy a house. They will be increasing their existing small mortgage on their current property to release some equity to help us buy a property near to them as we're relocating.

The new house (that we will be living in) will be paid for with the cash raised from their property so will not have a mortgage against it. We are going to put the new house in My parents, mine and my Husband's names.

We will then pay my parents the monthly amount that their current mortgage increases by, so they will continue to pay what they do now and we will pay the extra. What I want to know is whether my parents will be liaiable for income tax on the monthly payment we make to them each month.

The house will be owned by all four of us in case anything happens to either of us. So in reality they are loaning us the money and we are paying it back. Eventually the house will become solely ours. Would the tax office see this as us renting it from them? They wouldn't be making any profit as we will only be giving them money to cover the increase in their mortgage.

I tried ringing HMRC this afternoon but after explainning things the very unhelpful lady told me that she was not prepared to give me advice or tell me if they would have to pay tax as the tax office are not there to give advice on tax - how very unhelpful!! I did point out that they were always quick enough to advise on my tax return being due or VAT matters but with this she said I would have to pay a finacial advisor for advice - I just can't believe how ridiculous this is!!

Anyway, hopefully someone reading this may know the answer and if you do I'd be very grateful for any advice. Kind Regards Amelia

CLAPTON

well, if they are leaning you money and you are making capital repayments then there is no income tax considerations
if you are paying them interest then that is taxable as income

your post is not very clear on exactly what is loaned, what is given etc.

do bear in mind that if the house is ever sold then your parents will be liable for cgt on any gain on their share as they are no resident.

TrickyDicky101

I would recommend your parents making you a straight-forward loan of the money required and NOT being registered as an owner - it will reduce complications and make things much simpler when you come to sell/remortgage.

If you intend meeting the increased interest costs your parents will suffer on their mortgage as a result of borrowing more (to finance your house purchase) then legally they will need to account for tax on this income. If you were to pay them the interest (not necessarily the capital repayments) in the form of cash then I would estimate there is a 0% chance HMRC would identify any tax evasion occurring (although legally of course your parents would be evading tax due).

camptownraces

Ameliajane2011 wrote: »

Hi Everyone,

I posted a message on Friday and received lots of helpful replies so am hoping that I can get some more now!

My parents are going to be helping us buy a house. They will be increasing their existing small mortgage on their current property to release some equity to help us buy a property near to them as we're relocating.

The new house (that we will be living in) will be paid for with the cash raised from their property so will not have a mortgage against it. We are going to put the new house in My parents, mine and my Husband's names.

We will then pay my parents the monthly amount that their current mortgage increases by, so they will continue to pay what they do now and we will pay the extra. What I want to know is whether my parents will be liaiable for income tax on the monthly payment we make to them each month.

The house will be owned by all four of us in case anything happens to either of us. So in reality they are loaning us the money and we are paying it back. Eventually the house will become solely ours. Would the tax office see this as us renting it from them? They wouldn't be making any profit as we will only be giving them money to cover the increase in their mortgage.

The house you move into will be half yours, and there will be no mortgage on the new house.

The payments you make to your parents will, I believe, be seen as "rent" for your parents' half of the new house.

I would imagine that your parents' payment towards your half of the new house would be seen as a lifetime gift to you and your husband, possibly subject to tax . When the house becomes "wholly ours" that's possibly another gift.

If the situation's too complicated for HMRC helpline, you need an accountant who specialises in this area.

Taking the wrong advice from amateurs could cost you hundreds of thousands.

daisygrabber

I'd second the above. Much more complicated than you think (& than it should be really) but see an accountant. Most offer free first consultations and will only charge you for any work actually done (such as your tax return if one turns out to be needed) or advice given in writing if requested.
In any case, an accountant's consultation will be cheaper in every way than a possible HMRC investigation 6 years down the line.
Good luck with your new house!
xx

Ameliajane2011

Hi Everyone,

Thanks for your replies. I'm afraid that I'm still not really sure if my parents would or would not have to pay tax. I can't understand why them offering to help us should lead to them then having to pay tax. It seems there is always something getting in the way of any ideas we have lately.

I think I will ring around a couple of accountants.

Thanks again for your help.

Amelia

scarletjim

Ameliajane2011 wrote: »

I can't understand why them offering to help us should lead to them then having to pay tax.

I think it's basically because most financial transactions need to be taxed to fund public services, and if the government allowed people to avoid tax just because they were helping other people , then suddenly I'm sure you can imagine how many transactions would be 'dressed up' as helping others. Tax, and the framework set up to stop people dodging it as far as possible, is a necessary evil I'm afraid!

Ameliajane2011

I understand what your saying but I still find it ridiculous that my parents have offered to help me, their daughter and could be taxed because of it. The country is in such a state, my current house isn't selling, despite a very reasonable asking price, because of the lack of first time buyers able to get a mortgage in my local area and the mortgage companies are being ultra fussy because we're self-employed. My parents come up with a possible solution and the HMRC want to tax them! We all work really hard and sometimes it just feels like the government just want to take everything we have - sorry that turned into bit of a rant but I'm always having to pay large tax bills, large VAT bills and such like. I can see why people move abroad!!

00ec25

as others have said you have over complicated this and your plan is very bad for 3 reasons:
- your parents are liable to income tax because they are receiving (untaxed) income for the use by another party of an asset they (part) own.
- when they sell it (or transfer the share to you) they will be liable for CGT because they do not live in it, also you are related and therefore the calcualtion would be covered by the "connected persons" rules (they will pay more tax than otherwise)
- their share forms part of their estate so may be subject to Inheritance Tax if it above the relevant tax threshold at death

the simple solution is for:
- parents to sell their property and gift the money to you outright.
- you then buy the property in your name only using a sizeable deposit and a mortgage in your name only.
- this removes Income tax from parents, they don't own an asset so CGT is irrelevant and if they live for 7 years then the gift is free of any IHT liability (if it had any to start with)

if your parents must have the money back then you need to set up a formal documented loan agreement which proves that there is no profit element for the parents and it is a straight repayment loan. It is essential that the parents cannot have (part) ownership of the house as then it is back to looking like rent

Thrugelmir

Why don't you obtain a mortgage in your own names up to the amount you can afford? Merely borrowing any additional that's required.