Tax implications of renting to family

Scratch_indigo

Hello

I own a third of a property with my siblings. My parents live in the property and pay the equivalent of the mortgage on it. None of us have received any income from it and as far as I'm aware, haven't declared any expenses against it.
The rental market is about the same for equivalent properties in the area so my parents aren't paying a lower rent.

We bought the property when I lived and worked abroad ( i returned three years later and got a salaried job) and for some idiotic reason, despite asking for a self assessment form when i returned, couldn't actually remember why I needed one and so they told me I didn't need one.

I'm now panicking about HMRC and want to know:

What paperwork do I need to have to hand before talking to them?

Should I get advice from somewhere else before talking to them?

I'm quite embarrassed and feel like an idiot. I don't really want to discuss with my parents/ siblings until a) I know what I'm doing b) what any implications for them are?

[Deleted User]

"pay the equivalent of the mortgage on it"

What does this mean? Do you have a mortgage on it and their payment covers that? Did you buy it outright and calculate the mortgage cost and charge them that? Depending on the situation the advice you will be given varies.

Please try and provide as much information as possible. How much do they pay per month, where does the money go, how much is the mortgage (if there is one), what type of mortgage is it, has anyone in your arrangement paid any tax on the income?

Werdnal

When you receive rent from a property you are receiving an "income". Whether that income will incur tax depends on a number of things, but are are supposed to declare any income as if can also affect things like tax credits etc. If there are 3 owners, the income and tax liability is split 3 ways. You can be fined for not declaring, but if there was actually no tax to pay, this can be waived. If you are also working and therefore earning a wage, you are likely paying tax on that, and any additional "income" has to be declared as your total earnings.

When you say you have not received any "income" from the property, where is the rent your parent's pay going?

If the property has a mortgage, only the mortgage interest is a deductable expense against your rental "profit". Any repayment portion is not allowed. You can also deduct maintenance costs, agent expenses, utilities that you pay between tenants - ie the general "running" expenses of the property.

If it is mortgaged, you also need to check with the mortgage company whether there are any restrictions on who loves there. If it is a residential loan, the person holding the mortgage is supposed to be resident. If it is a BTL mortgage, many have clauses against "family" renting it.

Any property which is owned by someone who allows someone else to live there for payment falls under the requirements of letting laws and you should really gen up on all aspects of this. Does the property have a gas supply? Have you done annual gas safety certificate? What about insurance - let properties are not usually covered under normal building policy.

Just because they are your parents, doesn't mean you are not landlords and therefore covered by all the legal requirements of such. A good thread here will give you lots of info:

http://forums.moneysavingexpert.com/showpost.php?p=41160642&postcount=12

and there is a link within it for HMRC to see what you should be doing to declare this income.

Scratch_indigo

Thank you for the responses - especially the link (although I'm less sure about the advice of not renting to family)
I'm going to go and read all the links and work through all the paperwork and may come back with questions.

Thank you again. I did have a very quick chat with my mum last night and she said that the paperwork is all in place and there has been no profit in HMRCs viewpoint.

TrickyDicky101

How would your Mum know? It's not her tax return that's potentially wrong!

martindow

Scratch_indigo wrote: »

Thank you again. I did have a very quick chat with my mum last night and she said that the paperwork is all in place and there has been no profit in HMRCs viewpoint.

Is this your interpretation or have HMRC told you this? I understood that you should be completing a annual tax return whether there is profit or not.

xylophone

I own a third of a property with my siblings. My parents live in the property and pay the equivalent of the mortgage on it.

Your parents pay this sum into your account/the account of one of your siblings/ a joint account you hold with your siblings? The mortgage is then paid from this account? This payment is then the equivalent of rent?

The mortgagee is aware that the property is in effect rented out and to relatives?

I think that you need to discuss the situation with HMRC, the mortgagee and to ensure that you are fully aware of your rights and responsibilities as a landlord?

claire16c

How would your mum know?

I rent from my parents and we only pay the amount the mortgage is so they don't make a profit on top but I know my Dad still has to declare it all.

Werdnal

claire16c wrote: »

How would your mum know?

I rent from my parents and we only pay the amount the mortgage is so they don't make a profit on top but I know my Dad still has to declare it all.

Even that may not be correct! The only amount of mortgage that can be deducted is the INTEREST portion of the payment.

If you pay say £500/month in rent to your parents, and their mortgage payment is £500, split £100 interest and £400 repayment, then they can only deduct the £100 from your £500 rent, leaving £400 profit/month to be declared. If parent earn an income elsewhere, this rental income is taken as a whole with any other earnings. It can also affect any benefits they are claiming.

Its not that you are paying the same amount as the mortgage that makes any difference, it is what the actual mortgage payment covers!

G_M

* If rent is going towards a mortgage, that is income (your mortgage is being paid off!)

* if rental income is being received (whether directly, or indirectly via a mortgage repayment), a tax return must be completed

* whether tax is payable or not, a tax return must be completed

* the advice in my link about not letting to family is just that- advice. It even comes under the heading "General Advice"! It is not law, or a rule. The advice comes with an explanation. Naturally readers can choose disagree depending on their individual circumstances.

nzmegs

I have a very similar situation - my MIL lives in a property I own. She pays exactly the mortgage amount to us each month.

On my self assessment I claim her "rent" as income, then totally offset it as an expense (the interest on the mortgage). So I pay not tax on it. I do pay insurance on the property so I get a little tax back on that because it comes to more than the income made.

The mortgage is interest only, so there is no capital being paid off and no income being made.

I also made the mistake of thinking I didn't need to fill in these details on a self assessment because there was no profit. But I realised about one year in. So far it hasn't been a problem and I hope I could explain this oversight if I was audited.