Lodger or tenant or something else?

smartpicture

N79 wrote: »

If we take the OP's aim of providing his daughter with free accommodation (while not providing free accommodation for her girlfriend)...

Yes, that's exactly what I'm trying to achieve. Also making sure that if they split up, the girlfriend has to move out and my daughter's home and my investment is safe.

I'm inclining towards the idea of having my daughter as the tenant at a below-market nominal rent of, say, £10pm, then she has a Lodger Agreement with the girlfriend and charges her £500pm (which is still less than she pay normally). The £500pm would be tax-free as my daughter doesn't earn enough to pay tax (or possibly because it's rent-a-room, is that separate from other taxable earnings?). I wouldn't pay any tax as I wouldn't be getting any income from it (except £10), although obviously I'd have to do all the proper landlord things.

So what are the potential pitfalls with this setup?

N79

smartpicture wrote: »

So what are the potential pitfalls with this setup?

Pitfalls:

1) Tenancy won't be an AST, so to fully protect your position you will need appropriate clauses on assignment and security of tenure (or use a licence to occupy rather than a tenancy as I suggest above).

2) Not tax efficient - no ability to offset the costs and you are liable to capital gains on the property.

However, if you don't care about the costs / tax implications then it will probably work, subject to taking the usual caveats about taking proper advice in setting up the arrangements.

G_M

N79 wrote: »

Pitfalls:

1) Tenancy won't be an AST, so to fully protect your position you will need appropriate clauses on assignment and security of tenure (or use a licence to occupy rather than a tenancy as I suggest above).

2) Not tax efficient - no ability to offset the costs and you are liable to capital gains on the property.

Maybe I'm being slow but

Why wouldn't it be an AST? An AST does not have to be market rent (whatever that is) does it?

Since neither the OP nor daughter will be paying income tax on rental income, it is releatively tax efficient.

Capital Gains Tax is going to be an issue whatever the OP does, since the property is remaining in the OP's name but is not their main residence.

Yorkie1

I don't think the rent-a-room scheme will be available to the OP's daughter since 12 x £500 = £6K, i.e. over the threshold limit for r-a-r.

may_fair

G_M wrote: »

Maybe I'm being slow but

Why wouldn't it be an AST? An AST does not have to be market rent (whatever that is) does it?

Yes, it does; see Paragraph 3 Schedule 1 Housing Act 1988 - Tenancies which cannot be assured tenancies.

http://www.legislation.gov.uk/ukpga/1988/50/schedule/1

N79

G_M wrote: »

Maybe I'm being slow but

Why wouldn't it be an AST? An AST does not have to be market rent (whatever that is) does it?

Since neither the OP nor daughter will be paying income tax on rental income, it is releatively tax efficient.

Capital Gains Tax is going to be an issue whatever the OP does, since the property is remaining in the OP's name but is not their main residence.

1. As mayfair has said, while ASTs don't have to be at full market rent they have to be above a certain level - mayfair provides the link.

2. Not tax efficient is a relative of term, of course, but as proposed lodger income is above personal allowance so tax will need to be paid. As expenses will occur to someone else (father?) there is no possibility to offset to reduce the tax bill. Also, if property was in daughter's name then capital gains can be avoided - and some other mechanism used to protect the parent's interest. All would depend on how the property is financed.

00ec25

Yorkie1 wrote: »

I don't think the rent-a-room scheme will be available to the OP's daughter since 12 x £500 = £6K, i.e. over the threshold limit for r-a-r.

it most certainly is available, as exaplained in the guidance if income > tax free amount then tax is payable on the excess

the daughter will have to declare the income £6k and claim the relief £4,250 leaving 1,750 taxable

however assuming the daughter has no other source of taxable income (SLC loans obviously are excluded) then her total taxable income of £1,750 will be well within her personal allowance of £7475 so she will not pay any income tax at all - she is however legally required to declare the figures, she cannot say I don't so tax so don't need to tell HMRC about it

scheming_gypsy

smartpicture wrote: »

Yes, that's exactly what I'm trying to achieve. Also making sure that if they split up, the girlfriend has to move out and my daughter's home and my investment is safe.

I'm inclining towards the idea of having my daughter as the tenant at a below-market nominal rent of, say, £10pm, then she has a Lodger Agreement with the girlfriend and charges her £500pm (which is still less than she pay normally). The £500pm would be tax-free as my daughter doesn't earn enough to pay tax (or possibly because it's rent-a-room, is that separate from other taxable earnings?). I wouldn't pay any tax as I wouldn't be getting any income from it (except £10), although obviously I'd have to do all the proper landlord things.

So what are the potential pitfalls with this setup?

the arguments that will occur between them because your daughter is paying £10 a month rent and her girlfriend is paying £500 a month when they both have to live there together.

firsttimetom

smartpicture wrote: »

Yes, that's exactly what I'm trying to achieve. Also making sure that if they split up, the girlfriend has to move out and my daughter's home and my investment is safe.

I'm inclining towards the idea of having my daughter as the tenant at a below-market nominal rent of, say, £10pm, then she has a Lodger Agreement with the girlfriend and charges her £500pm (which is still less than she pay normally). The £500pm would be tax-free as my daughter doesn't earn enough to pay tax (or possibly because it's rent-a-room, is that separate from other taxable earnings?). I wouldn't pay any tax as I wouldn't be getting any income from it (except £10), although obviously I'd have to do all the proper landlord things.

So what are the potential pitfalls with this setup?

That sounds like it will cause no end of resentment

You will get £10 a month (which won't cover the mortgage, so you'll be a lot worse off).
Your Daughters Girlfriend will be £500 a month worse off
Your Daughter will (in effect) be £1000 a month better off as she will pay no rent and receive £500 a month from her partner.

This scenario will end in tears there is no doubt about it.

What does your Daughters Girlfriend do for a living and how much does she work? Can your Daughter find a better paid job (I know there isn't much out there, my G/F applied for well over 200 jobs before securing one!) or find more hours - i assume she has a part time job if she isn't paying tax?

Also what would happen if they were to split up. Could you afford the house without the girlfriends income?

I honestly think people should rent a place together before they make a leap of faith and buy, as you really never know how well you will live with a person until you actually do it and you stand to lose a lot less if you rent and break up than buy.

Maybe they could look in a 'less desirable area', or a little one bed, or even a Studio apartment just for the time being.

G_M

may_fair wrote: »

Yes, it does; see Paragraph 3 Schedule 1 Housing Act 1988 - Tenancies which cannot be assured tenancies.

http://www.legislation.gov.uk/ukpga/1988/50/schedule/1

So as long as the OP charges more than £1000 pa in London, or £250 pa outside London, AND the rent charged is at least 2/3rd of the ratable value, it could be an AST.

£500 pm is likely to comply with both requirements.