Best way to let parents stay in 2nd home?

alphabeta77

Hi,

We've just moved into a second home and we've kept the old one as we're planning on letting our parents stay there as they're currently renting.

I'm trying to work out the most tax-efficient way of doing this - they've got a reasonable pension, so could possibly afford the mortgage if it's possible to get a mortgage at 60+?

Alternatively I was wondering if we could guarantee the mortgage?

Next I was wondering if they should just 'rent' from us and pay the mortgage amount each month - however I guess we might be tax liable for the 'income' from them?

Finally I was wondering if we could just add them to the mortgage and thus let them pay.

Any ideas on above or any better methods?

Many thanks!

Savvy_Sue

I'd suggest that both you and your parents get some specialist tax planning advice, because there are probably a whole heap of other questions which should be asked at this stage, including will their estate be subject to Inheritance Tax and have both you and they made wills.

Then there's various 'what if' questions: what if one of them needs residential care, what if you and your spouse split up, what if they split up. I know you may not think any of these are likely scenarios, but they do IMO need to be thought about ...

antrobus

alphabeta77 wrote: »

...
Next I was wondering if they should just 'rent' from us and pay the mortgage amount each month - however I guess we might be tax liable for the 'income' from them?

I don't think there's any 'might' about it. Although you'd only be taxable on the profit, i.e. the amount by which the rent exceeded the mortgage interest (and only the interest mind you) and any other expenses you might have. (Buildings insurance, things like that.)

alphabeta77 wrote: »

..
Finally I was wondering if we could just add them to the mortgage and thus let them pay.

Wouldn't change anything in itself. The property would still be yours.

Yorkie1

You may already have looked into this, but in case you haven't ... If you receive money from them in return for letting them live there, you will become Landlords, with all that that entails.

Have a look at this thread to see all the responsibilities you'd be taking on. The fact you're renting to family doesn't absolve you of them.

From reading posts in the other forums, I think that most mortgage providers have an upper age limit for mortgages - perhaps mid-70's but you'd have to check - so any mortgage obtained by your parents to buy the house off you would have to be subject to that restriction as well as affordability criteria.

As for adding them to the mortgage, you'd need to check whether 4 people can all be on a mortgage deed. Your current lender may require you to take out a new mortgage rather than just adding them to the existing product - and that may involve a repayment penalty.

CLAPTON

full facts are always useful:

what sort of tax efficiency?

with a second home you are potentially liable to cgt when you eventually sell
is that your primary concern?

if they pay you rent then you are liable to tax on the profit; do you need them to pay rent, if not then tax isn't an issue

do they have a IHT liability?

what age are they?

kidmugsy

I've asked my BS about extending our mortgage: their reply was "up to age 75".

Savvy_Sue

CLAPTON wrote: »

if they pay you rent then you are liable to tax on the profit; do you need them to pay rent, if not then tax isn't an issue

I know you are more knowledgeable than I am, but my understanding was that if you did NOT charge rent in this situation, HMRC could still tax you on what you 'ought' to have had in rent.

John_Pierpoint

I once had a relative in this situation - she had been given a tenancy at £1
a year renewable on demand from the tenant.

I was not her executor so I did not know exactly her net worth at death, but I guessed it would not be much, especially as she had needed personal care for the last couple of years of her life.

The capital tax man and I agreed that we would treat this situation as an interest in possession trust terminated by death.
As the deceased, with the benefit of the interest in possession trust, only had a net worth of of (say) 10,000 over the then IHT nil rate band I was happy to pay (say) 3,000 in IHT rather than calculate 25 years worth of CGT.
[Especially as the ("remainder") beneficiaries retained the house for about 15 months and its rise in value during that time mopped up their nil rate CGT allowances.]

It is a shame the tax laws have changed; until the 1980's you could house a dependent parent rent free and incur no CGT liability on the home they occupied.

alphabeta77

So just to be clear, are you saying if I let my parents stay in the house for free, I'd still be liable for tax on my non-existent profits from the non-existent rent???

In answer to your questions Clapton:

what sort of tax efficiency?
Not sure I follow, just want to let them stay in the house - they'd like to contribute a bit from their pensions if possible ideally to cover the mortgage amount (ie otherwise we'd just sell and they'd rent from someone else)

with a second home you are potentially liable to cgt when you eventually sell is that your primary concern? No

if they pay you rent then you are liable to tax on the profit; do you need them to pay rent, if not then tax isn't an issue.
They don't have to, they'd just like to 'contribute' as we were planning on just selling the property.

do they have a IHT liability? Nope.

what age are they? 61 & 60

John_Pierpoint

So perhaps the interest in possession trust would work the best BUT since Gordon Brown changed the rules in 2006 perhaps not.

Life is a gamble, I have a relative where the wealth was concentrated in the 50 ish daughter - who went and died of breast cancer.

cte1111

In terms of income tax efficiency, the best bet is for your parents to pay rent roughly equivalent to your costs, e.g. interest part of the mortgage, buildings insurance and any other costs.

So your income would be say £400 and your outgoings £400 (£380 interest on the mortgage and £20 buildings insurance). Your net income from this would be zero and no tax to pay.

You will be liable for CGT when you eventually sell the property. This will be reduced by the period when the house was your principal private residence, as well as relief for the last 36 months and letting relief for the let period. The CGT liability can be split between yourself and your partner, to effectively use both of your CGT allowances.

Bear in mind what other people have said about the responsibilities of being a landlord, e.g. need for gas safety certificate etc.