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2nd home rented to family

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Do we need to complete a self assessment tax return?

We’ve taken out a mortage for my father as he cannot qualify for one himself due to his age and that he’s self employed. We don’t charge rent he pays mortage and insurance.

Do we need to file a self assessment for this income?

Dad provided some of the money for the deposit (I bought it off my mum who inherited it with a view to living in myself but obviously things changed quickly and I was emotionally attached to the house)

Now I’m concerned we should file but haven’t as we don’t make any profit on it at all. The concencus was when he died we’d sell it and split any equity between myself and my sisters

Both my husband and I are basic tax payers earning a comfortable but not stupid salary (20-30k each)
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  • 00ec25
    00ec25 Posts: 9,123 Forumite
    1,000 Posts Combo Breaker
    edited 30 July 2019 at 11:01PM
    likklegem wrote: »
    We don’t charge rent he pays mortage and insurance.

    Do we need to file a self assessment for this income?
    all depends on the numbers....

    no rent = fine
    BUT if the mortgage is a repayment one then your father IS paying "rent" because he is paying off the capital element of your mortgage. In other words your wealth is increasing as your mortgage decreases.

    HOWEVER, whether you actually make a PROFIT is the key question.
    a) he pays the capital that is your income
    b) he pays the mortgage interest, that is your cost
    c) he pays insurance, if that is the building then that cost would normally be a landlord responsibility so he is paying you income. Patently though, the cost of insurance is the same as the income you get for it, so a nil/nil scenario

    if a) < b) = no profit, no tax
    if a) > b) you may be liable for tax on that profit

    also bear in mind if total costs are <£1,000 you could claim the property trading allowance and offset that against income as the alternative way of calculating your profit.
    Naturally if your income is >£1,000 and costs <£1k you MUST declare the fact you have rental income to HMRC. You won't however be forced to do a tax return unless you: either, have no PAYE income through which a tax code adjustment would collect any tax you owe or your profit is >£2,500, the threshold at which a tax return is mandatory
  • likklegem
    likklegem Posts: 33 Forumite
    Part of the Furniture Combo Breaker
    Hi there

    Thank you very much. It’s a capital repayment mortage. The total cost of the capital/interest/insurance comes to the exact amount he gives me to pay it, so total per year is 4800ish. Do I need to contact HMRC - never thought about this when we did it last year
  • You can’t offset the capital element of the mortgage against the rental income so you may well be making a taxable profit on your rental income.
  • xylophone
    xylophone Posts: 45,607 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    Don't forget that you are a landlord and have a landlord's obligations.

    https://www.gov.uk/renting-out-a-property
    Dad provided some of the money for the deposit

    He made you a gift - this may have IHT implications in the future.



    The concencus* was when he died we’d sell it and split any equity between myself and my sisters

    The house is in your name solely?

    Your father cannot leave a property that is not his in his will - you will need to consider the CGT implications and the IHT implications for your estate of a gift to your sister.

    * consensus
  • likklegem
    likklegem Posts: 33 Forumite
    Part of the Furniture Combo Breaker
    edited 31 July 2019 at 10:37AM
    I thought as much. Nuts. I’ll have a word with dad and he can pay it. Technically it’s his mortage, his capital it’s just under my name.

    Oh well... my dad will end up with the bill :)

    Yes I suppose I am a landlord, if you look at it like that. However it was never done for that purpose, just because he couldn’t get a mortage so seemed like a good idea. I wanted dad to have some stability. Dads 61 so not old, and I’m hopeful he’ll be around for a long long time.

    With regards to a will, yes I know he can’t leave it to anyone else, but we’ve always been clear that when he was no longer with us, I’d sell the house and split the money between my sisters. The house is in mine and my husbands name as per mortgage and neither of us would cheat my sisters out of they’re ‘share’

    Yes house is legally mine, but morally it isn’t if that makes sense?
  • Who it belongs to “morally” isn’t really relevant to anything really. Technically it isn’t his mortgage, it’s yours. The capital is also yours if the house is in your name. The money he pays you is rent. You are a landlord. There’s no avoiding these facts.
  • Mojisola
    Mojisola Posts: 35,571 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    likklegem wrote: »
    Dads 61 so not old, and I’m hopeful he’ll be around for a long long time.

    we’ve always been clear that when he was no longer with us, I’d sell the house and split the money between my sisters.

    Bearing in mind that you will be a lot older by the time your father dies, you might not be in a position to give away two-thirds of your property.

    Deprivation of assets is an issue to be aware of for your Dad and also for you.

    If life goes well and you are fit and healthy and financially secure when he dies, all will be well but life doesn't always go so smoothly.
  • insured
    insured Posts: 122 Forumite
    Like others have said, there may be property tax implications depending on the profit you are deemed to be making from the property.
    There are two other taxes which are relevant. One will probably be significant, the other probably less so.
    The first is CGT.

    Your father does not own the property. You own the property. So when the house comes to be sold you will not be able to claim PPR relief. The only option would be to set up a trust. But that may cause CGT to be payable now and there may be SDLT to pay.

    The other one is POAT. Your father provided some of the deposit. He gifted you that deposit. He continues to benefit from the gift in circumstances which there would not be a GWROB for IHT. In the same way he probably pays for the repairs to the property. Another "gift" by him. Same POAT/GWROB.
    You need specialist advice to avoid this.
    On the plus side, if he ever needs long term care, it is unlikely that the property would be taken into consideration.
  • likklegem
    likklegem Posts: 33 Forumite
    Part of the Furniture Combo Breaker
    edited 31 July 2019 at 1:19PM
    Thanks everyone. I’m going to see a solicitor and an accountant based on advice given. Dad said he’d cover any of the tax implications I’d be hit with so that’s something to reassure me with. Family and finances eh? Never mix.

    With the CGT I assumed that would be the case, I’d just assumed given the value of the house (120k) that after any CGT was applied I’d just split whatever equally amongst us all. It’s never occurred to me not to.

    We are lucky that we only have a small mortage on our home (30k) and 5 years left to run on it, so the moeny never concerned me, and my sisters knew I’d give them they’re fair share as soon as practically possible when worse happened.
  • laticsforlife
    laticsforlife Posts: 1,313 Forumite
    Part of the Furniture 1,000 Posts
    I've not gone into the nth detail, but my initial thought of the whole scenario was one of no tax.

    The OP is neither the legal nor beneficial owner of the house (yet, so IHT may still be in point).

    I'd also argue that the OP is not the beneficial owner of the mortgage, and this can e be seen that they are not paying it off, the father is. If say he decided to repay the mortgage in full with his lottery win, no-one would suggest the house wasn't his would they?

    Just saying - the whole legal and beneficial owner element is not something new in tax, and comes about often with Sharia-type mortgages etc.

    It'd be different if the OP was paying the mortgage themselves, I'd be arguing beneficial ownership, and that would be taxable either as IHT or CGT depending on what happens in the future.

    PPR arguments then come into play.
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