Son living rent free

treecol

We're thinking of buying a 2nd property after receiving I sizeable inheritance. We are concerned about ending up with a non paying tenant & are considering renting to our son & his wife as they are currently in rented accommodation, seems to make sense for them to rent from us.
We need the income from the rental property & our son understands this. But a while ago we were working at a house & met the next door neighbour (in an area we want to buy in) He'd just put his house on the market & was desperate to sell. Turned out he lived in France & let his son stay in the house rent free. Somehow the Inland Revenue had got wind of this & was charging him back tax on the market rental value of the house for the 7 years his son had lived there rent free. They had apparently told him his son could not live there rent free, so they were taxing him as if he had paid rent. Hence he had to sell the house to pay it.
Is that correct?? Can your children not live in a house you own, but isn't your home, rent free? Or was there more to his story?
Just wondering in case at any point in the future our son were to miss a few payments.

macman

I think you may have got this totallly confused and the tax he was referring to was possibly CGT on the sale of a second home, not income tax on 'missing' rental income. Clearly more involved here than you have been told.

treecol

That's why I asked because he very clearly said it was because he had let his son stay rent free.
So we could let to our son & let him stay rent free without any tax being due except capital gains when we sell the property. (he will pay rent but just wondering)

agrinnall

If your neighbour has said that then either he has got it totally wrong or he's been told the wrong thing by HMRC - both are possible but I'd lean towards the former. It's no business of HMRC's what people do with their properties while they own them as long as they correctly declare any profits they might make, and allowing his son to stay rent free meant there was no profit. Certainly there would be CGT implications but income tax doesn't come into it.

terryw

agrinnall wrote: »

If your neighbour has said that then either he has got it totally wrong or he's been told the wrong thing by HMRC - both are possible but I'd lean towards the former. It's no business of HMRC's what people do with their properties while they own them as long as they correctly declare any profits they might make, and allowing his son to stay rent free meant there was no profit. Certainly there would be CGT implications but income tax doesn't come into it.

I agree fully and with macmans post above.

I suppose it is possible that as this guy lives in France he might be liable to French tax and they have such a tax but I doubt it.

booksurr

it sounds to me more likely that you do not have the full picture from your neighbour. If you own a property and allow your child to live there rent free then there is no way you would ever be liable to income tax on a deemed rental value unless you were fiddling expenses associated with the property. The tax demand in such instances would not be on a deemed rent but on the excess expenditure you claimed. (You would of course, as others say, be liable to CGT)

If the owner had tried to claim costs against their own tax on the basis the property was "let", then HMRC would most certainly have got heavy if there was a low or no rental income if the expenses claimed were more than the value of the rental income - lots of guidance on that topic eg: http://www.hmrc.gov.uk/manuals/pimmanual/pim2220.htm

there is also a very specific circumstance associated with Pre Owned Asset tax (POAT) and sub market rent, but that is very specialist and not worth even trying to explain here

treecol

Thank you all for the in put. I did think it was really odd, but then dismissed it until now as it wasn't relevant.