Using ‘gifted’ money to reduce rental income

Gazzak

Hi,

I am new to this forum and just had a couple of questions for people who may have been in a similar situation.

I own a rental property which I once lived in. The mortgage was residential and I got consent to let from the bank. After a few years of renting my mum needed somewhere to live so I let her live in my rental property. She pays 310 per month which is the same as the mortgage. It sounds cheap but it’s a 1 bed property with similar fetching around 350.

For a few years this was fine and my tax bill came to about 300 each year. Now the tax laws have changed and less interest is aloud be be set against tax I estimate my tax bill to be around 600. We are struggling a bit financially now my girlfriend (not joint owner) is out of work and I was wondering if there was a way to legally reduce the tax.

Someone told me that because it’s my mum renting the house, she is able to gift me 3000 per year tax free. If this is the case can I tell HMRC say she is living there rent free and use the 3000 gift to cover my mortgage? What are the legal implications of this? I don’t want to do anything dodgy but if I am legally entitled to the tax free money then I don’t see why this would be a problem? Has anyone else successfully used this?

BoGoF

It's not a gift.....end of.

And you are confusing Inheritance Tax gifts with Income Tax.

Keep_pedalling

As long as you mother is paying you full market rent then anything else she gives you to help out financially is not taxable. So if the full market rent is £350 pm, then It will be fine for her to pay you that amount in rent. She can, if she can afford it, help you out with separate gifts, and you only need to declare the £350pm on your tax returns.

Gazzak

Ok thanks for clearing that up for me.

laticsforlife

Sorry if I'm missing something here, but the previous answers haven't actually answered the questions you asked.

Many parents gift their children up to £3,000pa in the knowledge that it is OK to do so and not fall foul of either IHT or perhaps more importantly the dissipation of assets for care home payments from local councils.

So yes she can absolutely do that.

Then there's the rent - you have kind of set yourself up here as you will have said for several years that you've been getting rent, and all of a sudden it stops. however this in itself isn't uncommon, people have gaps in rental income all the time, when tenants leave etc.

I don't see whats wrong in you having a new rental agreement with your mum (a legal document therefore) that says she pays a nominal £1 pa rent.

There's nothing in the law that says you have to rent @ market value, and it is even quite prudent to rent to a family member at a nominal rent rather than have am empty property for example.

I suppose the worryers on here might say that HMRC could argue that it's an artificial arrangement, but a) it's so small they won't care and b) so long as it's all done in writing you can at least prove it's true (collect the £1 from her bank too).

Nobody (HMRC) would be able to argue with you if they asked and you could answer, well mum couldn't afford the rent so I'm letting her live there for free (£1).

The flip side though would be that as you are running a rental 'business' then the cost of the mortgage would create a loss in your 'accounts' for tax purposes. But you can simply NOT return a loss (i.e. stop filling those boxes at all, put a cessation date in).

You were far too honest in the outset for such small sums, good on you.

The £3,000 gifts have to be out of available income (I think thats the rule) by the way, not from saved capital, so she needs to have an excess of income of £3,000 over expenses to spare to give away.

unholyangel

laticsforlife wrote: »

Sorry if I'm missing something here, but the previous answers haven't actually answered the questions you asked.

Many parents gift their children up to £3,000pa in the knowledge that it is OK to do so and not fall foul of either IHT or perhaps more importantly the dissipation of assets for care home payments from local councils.

So yes she can absolutely do that.

Then there's the rent - you have kind of set yourself up here as you will have said for several years that you've been getting rent, and all of a sudden it stops. however this in itself isn't uncommon, people have gaps in rental income all the time, when tenants leave etc.

I don't see whats wrong in you having a new rental agreement with your mum (a legal document therefore) that says she pays a nominal £1 pa rent.

There's nothing in the law that says you have to rent @ market value, and it is even quite prudent to rent to a family member at a nominal rent rather than have am empty property for example.

I suppose the worryers on here might say that HMRC could argue that it's an artificial arrangement, but a) it's so small they won't care and b) so long as it's all done in writing you can at least prove it's true (collect the £1 from her bank too).

Nobody (HMRC) would be able to argue with you if they asked and you could answer, well mum couldn't afford the rent so I'm letting her live there for free (£1).

The flip side though would be that as you are running a rental 'business' then the cost of the mortgage would create a loss in your 'accounts' for tax purposes. But you can simply NOT return a loss (i.e. stop filling those boxes at all, put a cessation date in).

You were far too honest in the outset for such small sums, good on you.

The £3,000 gifts have to be out of available income (I think thats the rule) by the way, not from saved capital, so she needs to have an excess of income of £3,000 over expenses to spare to give away.

While simultaneously claiming to be receiving £3k a year from her as a "gift"....an amount that bears a very close proximity to the previous rental income? :huh:

It also potentially opens OP's mum up to deprivation of assets if she requires funding for care.

Sea_Shell

unholyangel wrote: »

While simultaneously claiming to be receiving £3k a year from her as a "gift"....an amount that bears a very close proximity to the previous rental income? :huh:

It also potentially opens OP's mum up to deprivation of assets if she requires funding for care.

But if that cash hit your account on your birthday with a reference of Happy birthday.....???

What if Mum made you an additional cardholder on a CC, and you used it for your day to day spending, of say, up to £300 per month...???

It's blurring the lines, definitely. hmmm

Mum isn't any worse off, so would DoA apply??

(just thinking out loud);)

unholyangel

Sea_Shell wrote: »

But if that cash hit your account on your birthday with a reference of Happy birthday.....???

What if Mum made you an additional cardholder on a CC, and you used it for your day to day spending, of say, up to £300 per month...???

It's blurring the lines, definitely. hmmm

Mum isn't any worse off, so would DoA apply??

(just thinking out loud);)

But if you're claiming to be so financially destitute that you can't afford a very basic necessity like rent, then you most definitely can't afford to be gifting £300, let alone £3000. Even if it is for a birthday.

If mums got enough to self fund then deprivation wouldn't apply. Other than that, it varies. But again, having the funds to self fund is at odds with the suggested claim that she can't afford to pay market rent. A months rent costs a lot less than a months care!

Even if it was accepted as a gift, OP would be looking at limiting income to the 3k while not being able to claim relief for any expenses. Currently income is £3720 with tax cost of £300. So it would seem that trying to go down that route would be cutting off your nose to spite your face imo.

Davy_Jones_II

If you and your mother are happy to commit fraud then why do it on such a small scale?

Once you cross that line you may as well do it properly, and go for something like The people that you see on watchdog.

You’ll be taking money from pensioners anyway, so why don’t the pair of you go for the meter reading scam, where one of you keeps them talking while the other asks to use the bathroom and rifles through their cupboards looking for money or jewellery?

Think big, if you are going to be criminal, make it worth your while.