Residenial mortgage - both primary resident and his parents live in the property

WOP8995

Hello - I have a residential mortgage / family occupiers query and would really appreciate some help/advice. Despite hours of googling/research, I was unable to find an answer - thank you so much for your help!

Me and my sibling took out a residential mortgage one year ago (50/50 split). My brother is the primary resident and lives at the property; I do not live at the property (I live and work miles away, so I rent another property with my partner).

In addition, my parents also live with at the property. Their names are not on the mortgage (they could not take out a mortgage themselves due to age) and they have no legal claim to the property. Instead, they both occupy the property and they both signed the occupier declaration that they 'will not assert any interest in or right to reside in the property'. My parents work full-time; their income was not considered in the affordability calculation performed by the lender.

We've declared all of the above facts to the lender before getting the mortgage (i.e. me not living at the property, and parents occupying the property - in fact, our mortgage offer contained the additional obligation stating that, on completion, my sibling will occupy the property with my parents and nobody else).

So far so good. Now comes the money part.

Our mortgage is ~Xpcm and the payment comes from my account. On a monthly basis, I receive ~0.76X from my parents (0.38X each) via standing order, ~0.15X from my sibling, and I cover the rest.

My question is - how should I treat the money paid by my parents to me? I've done many hours of googling but could not find a straight answer. It seems that the options are:

1. 'Gift' / some kind of 'allowance' - could argue that my parents are simply sending me money on a monthly basis which is unrelated to the mortgage (for example, there's no tenancy agreement in place - we simply agreed verbally that they will send a share of their taxable income into my account). Are there any potential inheritance tax implications for me or my parents (e.g. if I receive more than the annual gift allowance - £3,000 pa)?

2. It's actual rental income - could argue that this ~0.76X payment goes towards covering mortgage payments, so it's technically income and it is 'as if' my parents are paying rent, although there's no tenancy agreement in place - do i then have to declare this as income and potentially pay tax? Am I sharing this income with my sibling so we both need to pay tax? Do I need to inform my lender?

3. It's just my parents' share of household expenses as joint occupiers with my brother, so there is nothing to declare or pay tax on. 

Once again, many thanks for your help.

tasticz

what is the value of 'X'?

Thrugelmir

In your hands it's technically rent.  Against the profit you make you'll receive an allowance at the basic rate of tax for the interest element of the mortgage repayment. The capital element of the mortgage is paid out of after tax income. 

You'll also be potentially liable for Capital Gains Tax when you come to sell or gift your share of the property. 

ritz55

Depends on the value of X but my thoguh would be they are a lodger and therefore the second applies. There is an annual allowance for a lodger before tax is due. 

WOP8995

Thank you for your replies.
X = £900. If you could let me know whether that changes things, it would be great.

[Deleted User]

The lack of a written tenancy agreement doesnt in any way stop a tenancy agreement being in place.  If you are providing housing in return for a payment then a contract has been formed.  
In this case given your brother is an owner of the house I would say it is more likely to be lodger income than an AST being formed. 
In which case you have atax free allowance of £7500 under the rent a room scheme.  As you receive more than this amount you need to submit a self assesment tax return each year and claim the allowance and pay tax on the remainder

https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme

WOP8995

Thank you @Deleted_User.
This arrangement started in Nov 2020, so for 2020/2021 am I correct in assuming that I do not have to declare anything, as the total payments from my parents were under the threshold for the tax year (~5x750=£3750)? 
My second question is - do I need to tell my lender about this lodger arrangement? My initial thinking is that a) the lender knows that my parents occupy the property and b) lenders' affordability assessment did not take into account my parents income, hence they don't really care - they gave us the mortgage based on our income only, and without assuming any extra help from our parents. In other words, it's up to us to decide how to split the payments and deal with any taxes etc.

[Deleted User]

I would take from what you have said that since you are under the £7500 then you do not need to submit a return (insert the 'i am not a tax advisor' disclaimer here)

re the mortgage, the lodger bit is more about your parents obtaining a legal interest in the property through regular payments and upkeep.  Not to do with them living there, or affordability.  Its just the lender trying to protect their ability to easily reposess in the future.  
On my criteria pages Natwest state they do not allow lodgers to be in the property as part of a new application but how they feel about it when the mortgage is already up and running is something you would have to either check with them directly (not a broker process so i dont know the answer) or just ignore and carry on with what you are doing

ACG

Is there nothing you can do under the rent a room scheme? As your brother still lives in the property it could be seen that your parents are lodgers? 

I am not sure on the rules etc. 

WOP8995

Thank you ACG and Deleted_User. I think rent a room scheme is the answer here, given our circumstances.
One more thing which I'm struggling to understand is whether or not me and my brother are technically in breach of our mortgage terms? Looking at the terms, although there's no mention of 'lodgers' at all, the 'Unacceptable Tenancies' section includes a scenario of 'letting to a member of family' - is this different from being a lodger?

Again, we've made it clear from the outset to the lender that my parents are going to live at the house (that's why they had to sign the occupier declaration, waiving all claims to the property). So, does it make a difference to the lender whether my parents cover some of the mortgage payments? To clarify my point - if my parents paid 0, then there is nothing to disclose to the lender. But if they pay £700pcm, is this 'letting', so it needs to be disclosed as we're potentially breaching the terms?

[Deleted User]

yes taking money in exchange for providing a home makes a difference at it muddies the water on a claim against the property.   It becomes a regulated Buy to Let when you rent to family rather than just a residential mortgage.  It is a strong grey area since they are just lodgers so have less rights than tenants but technically you are in breach

People breach the mortgage conditions all the time and dont realise it. I knocked a wall down and rejigged a few bits in my house.  Technically i'm in breach of my mortgage conditions as I should have asked their permission.  I can sleep at night knowing they wont care and i pay them each month  

If i was in your shoes I would just sort out the tax situation and then move on.  Its an infinitely small chance that the lender would care about what you are doing and an even smaller chance they would do anything about it