‘Renting’ to family

pac-man

Someone I know well didn’t do loads of research before buying a property to house an older family member and as an additional investment for themselves.

the family member is registered as a resident on the mortgage and have signed a waiver stating they have no claim on the property. They ‘gift’ the owner of the house a financial amount per month that doesn’t cover the mortgage. No tenancy in place. The owner of the property doesn’t live there. They’ve asked me to get some advice on their behalf as I’ve said I think they may be in the do do.

1) should tax be paid on this ‘gift’ or would it be seen as rent? It’s around £8-10k year but is obviously not profit and is actually loss making unless the home grew in value to cover that loss.
2) would the mortgage company be upset that the owner wasn’t living there if they knew? Not sure if they already do as It’s a normal residential mortgage.

Done with the best of intentions…

anselld

The income should be declared on self assessment.  Mortgage interest is not an allowable expense in calculating profit (though 20% of the interest only element can be claimed later in the process). So the £8k tips the balance straight away.
   https://www.gov.uk/renting-out-a-property/paying-tax
There are other legal implications - gas safety certificate , EICR, etc.
Not sure about the Mortgage Co or Insurance but probably risky on both counts.

Voyager2002

The mortgage lender is likely to be extremely upset: when your relative bought the property he would have declared that it was going to be his home and this declaration is almost certainly untrue.

Two tests that might be applied:

if the 'gifts' from the older family member were to stop, would they still be welcome to live in the house?

if the house were no longer provided, would the 'gifts' continue to be made?

Your friend would need to demonstrate that the answers to both questions would be 'yes', and I don't see how he could do that.

silvercar

Given the resident has signed a waiver, the mortgage lender won’t probably be too concerned whether the borrower lives in the property or not. Technically it’s a regulated BTL, which is virtually identical to a residential mortgage.

As for the “rent”, could it be a contribution to the running costs? If it is definitely rent, then a tenancy has been created even if not written and all landlord obligations should be met. 

It’s a difficult situation, when clearly it has been done to help family members with no intention to make a profit.

elsien

It’s not a gift though is it? no point pretending that it is because it’s not going to stand up to any degree of scrutiny. 

FlorayG

This is a legal tenancy and subject to all the rules and regulations therein. There doesn't have to be a written agreement. The money your friend gets is rent.
i know because my friend lives rent free in a house belonging to a friend of hers - he still has a BTL mortgage on it and is responsible for all the landlord requirements even though she gives him nothing. She is spending her own money on improving the property so when she eventually dies or leaves he will have a property worth more than he paid - this is their agreement. She's still a tenant
On the  plus side, the mortgage company might be best left in the dark...I know a couple of people who live in BTL mortgaged houses that are their 'own' and a few tenants in residential mortgage houses. My mortgage advisor tells me that once you get the mortgage then as long as you pay it every month and there aren't any problems they will not check ( until you need to remortgage, of course)

FlorayG

From a legal website;

1. Can I Charge Reduced Rent to Family Members?

   • Yes, you can charge reduced rent to family members. However, you need to be aware that doing so may limit your ability to claim full tax relief on expenses related to the property.

2. How Does HMRC View Below Market Rent?

   • HMRC views below market rent as a non-commercial arrangement. This means that you may only be able to claim expenses up to the amount of rental income received, which can limit tax relief on allowable expenses.

3. What if I Don't Declare Rental Income?

   • Failing to declare rental income is considered tax evasion and can result in significant penalties and interest charges. It's crucial to ensure all rental income is accurately reported to HMRC.

theartfullodger

Agreed, legal tenancy.  In England a tenancy can be verbal as here, entirely legal, bonkers, other countries do things better (eg Scotland).

But very unwise for landlord (who must declare ALL income) as with nothing in writing eviction would be v v difficult.

Blimey there are some daft people living amongst us...

silvercar

theartfullodger said:

Agreed, legal tenancy.  In England a tenancy can be verbal as here, entirely legal, bonkers, other countries do things better (eg Scotland).

But very unwise for landlord (who must declare ALL income) as with nothing in writing eviction would be v v difficult.

Blimey there are some daft people living amongst us...

Or just people who want to help out family members. Not every action everyone takes is for £££.

I don't think there is anything daft about people who have been dealt a better hand helping out those that haven't. Even more reason to do so if they are close family or friends.

SiliconChip

silvercar said:

theartfullodger said:

Agreed, legal tenancy.  In England a tenancy can be verbal as here, entirely legal, bonkers, other countries do things better (eg Scotland).

But very unwise for landlord (who must declare ALL income) as with nothing in writing eviction would be v v difficult.

Blimey there are some daft people living amongst us...

Or just people who want to help out family members. Not every action everyone takes is for £££.

I don't think there is anything daft about people who have been dealt a better hand helping out those that haven't. Even more reason to do so if they are close family or friends.

I don't think artful was suggesting that doing it was daft, just that not doing it properly is the action of a daft landlord.

elsien

They probably need to consider changing to a BTL mortgage, setting up a proper tenancy with all the obligations that involves, then sorting out any tax implications afterwards. Or moving back in themselves.