Rent from Mother in Law

colman12

Hi,

Would like to run this past people on here:

Wife and I about to buy a flat for our mother.

Mother will pay rent (covering mortgage + ground rent etc) to us.

Am I right to say, if we structured it that way the wife (lower rate tax payer / not likely to work in the future, looking after kids) owned 100% of the property, the "rental profit" from the flat would be taxed at her lower rate (or 0 if it all got used against personal allowance).

We would also be protected when we came to sell it, as CGT would be levied at 18% rather than the higher rate

Is my understanding correct?

And don't worry about comments on the wife owning 100% of the property. That's fine.

Thanks,

G_M

I believe you arre right on both counts.

colman12

Great, thank you.

DumbMuscle

colman12 wrote: »

We would also be protected when we came to sell it, as CGT would be levied at 18% rather than the higher rate

Probably, unless you make a very large gain (~£40k)
Depends how large the gain is! If the gain is larger than (capital gains allowance) + (basic rate income tax threshold) - (income for that tax year after deduction of income tax allowance), then you will pay higher rate (18%) on that excess. See https://www.gov.uk/capital-gains-tax/rates

CGT allowance is currently £11,300. Basic rate threshold is currently £33,500 (not including the income tax allowance)

colman12

Thanks, CGT is secondary concern, as it is 30 years out probably.

It isn't an "investment property", so not expected large capital gains.

My idea is to shield myself from a higher tax liability by allocating the income against my wife's tax status.

It is shame that renting to a family member is treated in this way but from what I have read, there is no difference between renting to a family member and renting to a stranger.

The idea is to charge the "rent" to cover the mortgage + ground rent + service charge. Is there any risks around being seen to charge a "below the market" rent?

This is an over 60's property, so in reality the market is restricted, so a "rent" from the flat would not be comparable to the average rental price in the area.

G_M

I think charging below market rate only becomes an issue if the tenant claims benefits eg HB.

No impact on income tax or CGT.

Other possible issues to consider:

* mortgage. Will need to be BTL, and maney lenders do not permit letting to family.
* "over 60's property" Are you eligible to buy? Check the terms. Also these are often leasehold, or have covenants. Check carefully that letting is permitted (or perhaps requires consent).

colman12

Thanks for the other flags.

The mother in law is currently working so can support the "rent". In time, and once she retires, if she can claim HB which can come to us, through rent, we could revise the rental charge to ensure it is "more alligned"

Mortgage is fully under written. Consent to own the property has been obtained from the Freeholder, so all ok on that side.

I don't think it is called a BTL, as you can't have a family member living there. This would be deemed a second residential mortgage.

We are a matter of days away from exchange. But i thought about this issue on "renting" it to her. I think structure the ownership in this manner is the most efficient thing I can do.

00ec25

colman12 wrote: »

My idea is to shield myself from a higher tax liability by allocating the income against my wife's tax status.

can i just caution against your use of language

in order for your wife to have all of the income she must be the sole owner. In that case you are not "allocating" anything as it is not yours to allocate. I appreciate a married couple thinks and acts as "we", but not in the case of income tax on property rent!!!

colman12 wrote: »

The idea is to charge the "rent" to cover the mortgage + ground rent + service charge. Is there any risks around being seen to charge a "below the market" rent?

This is an over 60's property, so in reality the market is restricted, so a "rent" from the flat would not be comparable to the average rental price in the area.

the only technical restriction applicable where there is a below market rate rent is that she cannot claim a loss. The amount of costs she can claim are capped at the actual rent she received, and therefore the "best" she can do is have zero net tax liability.

Naturally as she plans to charge rent equal to her costs that is going to be the outcome anyway.

Is she funding the purchase with a mortgage?
If yes then make sure she understands that any capital repayment element of the mortgage is not an eligible cost for her tax calculation, and therefore she may well end up with an income tax liability.

Also note that if you are party to the mortgage, but are not an owner, then only her share of the mortgage interest can be claimed. Your share of the mortgage would not be claimable anywhere as you are not an owner of the rental property and therefore have no right to any income from it or costs to offset against it.

LilElvis

colman12 wrote: »

It isn't an "investment property", so not expected large capital gains.

You might be surprised. In the 12 years that my MIL has owned her 2 bedroom / 2 bathroom retirement flat they've gone from £500k to over £750k with none of them staying on the market for more than about a month.

00ec25

colman12 wrote: »

The mother in law is currently working so can support the "rent". In time, and once she retires, if she can claim HB which can come to us, through rent, we could revise the rental charge to ensure it is "more alligned"

that would cause problems because you are varying the level of rent specifically and only because she is then claiming benefit. As such the benefit may (not will) be capped for obvious reasons, you intend manipulating the system for financial gain.

the phrase used is "contrived tenancy"

colman12 wrote: »

Mortgage is fully under written. Consent to own the property has been obtained from the Freeholder, so all ok on that side.

I don't think it is called a BTL, as you can't have a family member living there. This would be deemed a second residential mortgage.

We are a matter of days away from exchange. But i thought about this issue on "renting" it to her. I think structure the ownership in this manner is the most efficient thing I can do.

take note of what i posted above re who is party to the mortagge nad how that limits the costs that can be claimed.

As a second residential mortgage it is I assume a repayment one (?) and therefore the capital component is not a tax cost, nor is your share of it.

DumbMuscle

colman12 wrote: »

Thanks for the other flags.

The mother in law is currently working so can support the "rent". In time, and once she retires, if she can claim HB which can come to us, through rent, we could revise the rental charge to ensure it is "more alligned"

Mortgage is fully under written. Consent to own the property has been obtained from the Freeholder, so all ok on that side.

I don't think it is called a BTL, as you can't have a family member living there. This would be deemed a second residential mortgage.

We are a matter of days away from exchange. But i thought about this issue on "renting" it to her. I think structure the ownership in this manner is the most efficient thing I can do.

So you have a mortgage offer, and the mortgage company is aware that you will not be living there and will be renting to your mother? Check the mortgage offer terms to make sure they cover your situation. At that point, what "type" of mortgage it is doesn't matter, and you're OK.


A few minor questions, for which the answers aren't all that important so long as your wife and your MIL agree what they are.

• What will happen to the rent once the mortgage is paid off?
• What about when the mortgage payments/ground rent change (e.g. end of a fix)?
• What about fees for remortgaging?
• Will you give your MIL the option of overpaying to get the mortgage paid off sooner?