Tax implications of renting main residence

moedeeb

My 88 year old mother-in-law is now permanently resident in a nursing home with severe dementia. To help her fund the care we have started to rent her house as a short term let through Air B and B. 

My wife has power of attorney and we are letting the house through an agency. 

Obviously the profits  will need to be declared by my Mother in law to HMRC and she is already well into paying basic rate tax based on existing pension income.

i have two questions 1 how do I actually submit the property profit to HMRC ?
and 2. Will the property cease to be considered her main residence and will this impact liability for Capital Gains Tax if  we (she) needs to sell the property to fund her care. The house is left to my wife and sister in the will. 

numbers . She has a pension based income of £28,000, Care home costs £60,000 per year. Current savings down to £100k, expected net income from letting property £26000. 

Answers and tips on saving tax much appreciated.

Dazed_and_C0nfused

Others will no doubt comment on the CGT aspect but as far as the rental income is concerned she/the POA will need to file a Self Assessment return each year.

As she is over 75 (max for pension contributions) not much can be done to save tax other than ensuring any Gift Aid donations she makes are entered in the appropriate page of the tax return.  

These payments increase her basic rate band.  Which with taxable income of £54k, she is well above and into paying higher rate tax.  Or at least in a full tax year she will be, maybe not 2024-25 if rental income is only a part year.

Voyager2002

Any reason why the property is not being sold?

Managing it as a rental property is a hassle for your wife, presumably one that she could do without. And letting the property for an extended period could lead to a hefty bill for capital gains tax if it is then sold: tax is calculated on the capital gain since it was originally purchased (presumably a lot) multiplied by the proportion of the time it was owned that it has been a rental property. (Other reliefs come into the calculation as well.) Having said that, if she still owns the house when she dies the capital gain is irrelevant for inheritance tax.

Hoenir

moedeeb said:

expected net income from letting property £26000. 

With an AIrBNB can you be certain of this? 

Grumpy_chap

Everything that is done for the MiL by the OP's wife acting under PoA has to be done in the best interests of the MiL.

This poses the obvious question whether renting the house is better for the MiL than simply selling and then using the proceeds to fund her care.  £26k of nett letting income suggests a house with a substantial value.

The Attorney should not have any consideration as to what the Attorney (or others) might inherit at some future point.

It is appropriate for the Attorney to consider how the MiL's tax liability might be reduced, but not obvious how any decision to make charitable donations can be demonstrated as being to benefit the MiL.  Yes, less tax liability but only because 100% of the respective amount has been donated.  The tax would be only 40% of the respective amount.

Dazed_and_C0nfused

Grumpy_chap said:

Everything that is done for the MiL by the OP's wife acting under PoA has to be done in the best interests of the MiL.

This poses the obvious question whether renting the house is better for the MiL than simply selling and then using the proceeds to fund her care.  £26k of nett letting income suggests a house with a substantial value.

The Attorney should not have any consideration as to what the Attorney (or others) might inherit at some future point.

It is appropriate for the Attorney to consider how the MiL's tax liability might be reduced, but not obvious how any decision to make charitable donations can be demonstrated as being to benefit the MiL.  Yes, less tax liability but only because 100% of the respective amount has been donated.  The tax would be only 40% of the respective amount.

Just to clarify me reference to GIft Aid related to any existing donations the MiL might be making.

For example National Trust membership can be paid with Gift Aid factored in.

I'm not suggesting using the rental income to make new/increased donations.

moedeeb

Thanks all. Our current justification for renting is to provide an income sufficient to fund care for as long as possible before selling the house. Hopefully it is better to preserve her assets in her interest so that she can stay in a suitable care home as long as possible. As soon as we sell the house her assets will deplete at a faster rate with less ongoing income. We will sell if needed 

on CGT she bought for 40K in the 1986  and current value is 400k so am I right in the calculation that gain = £360k (assume we rent for next 5 years) 5/43 as % multiplied by gain 360.* 11.62% = 41,832 at CGT of 20% = £8366

Grumpy_chap

Dazed_and_C0nfused said:

Grumpy_chap said:

Everything that is done for the MiL by the OP's wife acting under PoA has to be done in the best interests of the MiL.

This poses the obvious question whether renting the house is better for the MiL than simply selling and then using the proceeds to fund her care.  £26k of nett letting income suggests a house with a substantial value.

The Attorney should not have any consideration as to what the Attorney (or others) might inherit at some future point.

It is appropriate for the Attorney to consider how the MiL's tax liability might be reduced, but not obvious how any decision to make charitable donations can be demonstrated as being to benefit the MiL.  Yes, less tax liability but only because 100% of the respective amount has been donated.  The tax would be only 40% of the respective amount.

Just to clarify me reference to GIft Aid related to any existing donations the MiL might be making.

For example National Trust membership can be paid with Gift Aid factored in.

I'm not suggesting using the rental income to make new/increased donations.

Thank you

Even continuing donations may be subject to challenge. 
If MiL has always donated £100 per month to, say, Cancer Research, that is without direct benefit and so continuing the same would be appropriate. 
However, items such as National Trust membership, which have a direct personal benefit of access to their properties might not be appropriate now MiL is unable to visit.  
It depends, in part, why MiL made those donations.  Was it to support National Trust, or was it to gain the entry, or a bit of both?  In the scheme of things, National Trust membership won't make a large difference.

On the subject to Gift Aid, if the MiL did not Gift Aid whatever ongoing donations she made previously, it may not be appropriate to start.  This is difficult for the Attorney as they should act in the best interests of MiL, but I understand taking MiL's rational preferences into account is also relevant. 
I mention this because my Mum refuses to Gift Aid anything as, despite being a higher rate tax payer, she has had so much drilled into her through various OAP social groups about declaring Gift Aid and becoming liable for the tax if income falls to below the personal allowance, she is scared of the latter happening and an unexpected bill arising that she simply won't do any Gift Aid.  It is the problem of "support groups" making comments on the assumption all old people are on the edge of poverty and unable to qualify the comments for the better off.  If my Mum reaches the point that her affairs need to be managed under PoA, would it be appropriate for her Attorney to start declaring her Gift Aid so reducing her tax liability, or should her preference to not Gift Aid be honoured?  (Fortunately, this won't be a problem for me as I am not listed as her Attorney should the event arise.)

Grumpy_chap

moedeeb said:

expected net income from letting property £26000. 

moedeeb said:

current value is 400k 

I know you are doing Air BnB rather than long term letting (AST) so the income will be higher but so will the effort  and expenditure required.

But £26k net income from £400k house seems rather optimistic being 6.5% after Managing Agent fees.
If it was that easy everyone would be doing it.

Tucosalamanca

If I was in that situation, I'd probably call my accountant and ask them to crunch some numbers and see what they come up with.

• Taxes payable in the current situation
• Potential CGT liability
• Potential IHT implications
• How keeping the property and renting as an Airbnb compares to selling and investing the proceeds elsewhere.

Their findings might offer some different perspectives and options or even confirm that your plan is the best (or close enough). This would give you piece of mind that you're doing the right thing.

Based on the sums involved, a couple of hours accountancy fees could be money well spent.
Having them prepare MIL's annual return might also be beneficial, for the modest amount it costs...

Grumpy_chap

Tucosalamanca said:

• Potential IHT implications

Estate seems to be £400 k property plus £100k cash / savings / investments.
IHT won't be an issue.