‘Renting’ to family

pac-man

Thank you all. The fact that this is probably a ‘rent’ contribution rather than a ‘gift’ is kind of what I thought. They have always gifted money to my friend on an irregular basis. The regularity of these payments only started since they moved in and made me think that it wouldn’t stand up to scrutiny as being a ‘gift’, rather than ‘rent’. I read all the stuff on the gov website and stated I thought that they would need to pay income tax on the money they received and that I didn’t want them to end up with prosecution if this were unearthed. 

The owner of the property did contemplate moving in so that they became their lodgers, rather than tenants but then decided on further thought that it had been worked that the relative were ‘residents’ on the mortgage and merely ‘gifting’ a certain amount each month. I was initially reassured (until I realised that a lot of previous financial decisions on this had been poorly researched) and thought we’d better double check. They would struggle to cover the mortgage on their own without the ‘gifts’ while still living elsewhere, requiring more support from the family they live with to plug the gap in finances.

Thank you for your thoughts. I think they may contemplate leaving their family and current home to move in with the relative to avoid selling the house and needing them look for more secure, official and affordable housing. My advice would probably be that they just need an open conversation with the relative about it not having worked out due to lack of research in to the legalities of what was arranged, sell the home, support them with rehousing and moving. Then draw a line under it as a badly executed, albeit generous idea. 

These are peoples lives though, so not so easy for my friend and I think they feel a lot of guilt to both their relative and their own family that they’ve unwitting dragged in to supporting this scheme through lack of research and wanting to ‘help’ the older relative.

FlorayG

First of all, the landlord can't just move in with the tenant unless the tenant is fully willing to give up their tenancy.
Second, the tax is due on all past payments even if they do 'fix things' this way ( they can earn up to £7,000 a year tax free from a lodger)
Third, why not call it rent and pay tax on it and make it up to an amount they can afford to pay tax on and still have enough to pay the mortgage? Is the relative living there able to pay? If not, could he get benefits that will cover it?
Fourth, if they sell the home, where will the relative go? Council won't rehouse someone voluntarily homeless.
Fifth, if it's 'gifts' and not 'rent' ( which it isn't, but just pointing this out) there is a limit to how much a person can gift every year without being liable for tax on their estate. I don't know the ins and outs of it but I know the limit is £3,000 a year. So probably SOMEBODY owes tax on the money your friends are being given

elsien

FlorayG said:

First of all, the landlord can't just move in with the tenant unless the tenant is fully willing to give up their tenancy.
Second, the tax is due on all past payments even if they do 'fix things' this way ( they can earn up to £7,000 a year tax free from a lodger)
Third, why not call it rent and pay tax on it and make it up to an amount they can afford to pay tax on and still have enough to pay the mortgage? Is the relative living there able to pay? If not, could he get benefits that will cover it?
Fourth, if they sell the home, where will the relative go? Council won't rehouse someone voluntarily homeless.
Fifth, if it's 'gifts' and not 'rent' ( which it isn't, but just pointing this out) there is a limit to how much a person can gift every year without being liable for tax on their estate. I don't know the ins and outs of it but I know the limit is £3,000 a year. So probably SOMEBODY owes tax on the money your friends are being given

Couple of points -
House being sold by the owner is not the relative making themselves voluntarily homeless because they have no say in it and it is out of their control. 
Getting benefits to pay rent to the owner  is not impossible but does need to get round the contrived tenancy rules. 

FlorayG

elsien said:

FlorayG said:

First of all, the landlord can't just move in with the tenant unless the tenant is fully willing to give up their tenancy.
Second, the tax is due on all past payments even if they do 'fix things' this way ( they can earn up to £7,000 a year tax free from a lodger)
Third, why not call it rent and pay tax on it and make it up to an amount they can afford to pay tax on and still have enough to pay the mortgage? Is the relative living there able to pay? If not, could he get benefits that will cover it?
Fourth, if they sell the home, where will the relative go? Council won't rehouse someone voluntarily homeless.
Fifth, if it's 'gifts' and not 'rent' ( which it isn't, but just pointing this out) there is a limit to how much a person can gift every year without being liable for tax on their estate. I don't know the ins and outs of it but I know the limit is £3,000 a year. So probably SOMEBODY owes tax on the money your friends are being given

Couple of points -
House being sold by the owner is not the relative making themselves voluntarily homeless because they have no say in it and it is out of their control. 
Getting benefits to pay rent to the owner  is not impossible but does need to get round the contrived tenancy rules. 

They are voluntarily homeless if they move before a court order send in bailiffs. I can't imagine a relative subjecting their landlord to this, but it's the law

RAS

Gifts over £3k per annum need to be accounted for when calculating IHT, unless the donor survives 7 years.

theartfullodger

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.

Helping others is of course laudable: But renting with NO paperwork thus making any eviction v v difficult, uncertainty over what the deal is (dates, amounts, who does what)  and likely raising HMRCs suspicions if they hear about it is, in my humble opinion, daft.  

And many many landlords, myself included, think renting to friends  or family unwise: One of the quickest ways to ruin relationships.  Not being daft is not a requirement for being a landlord (nor having half-a-brain...).

But hey, free country, if landlord  really wants to make his own life so likely/potentially difficult, his choice..   I speak from experience of renting with flaky paperwork which turned out painful, complicated, long-drawn out & expensive. My stupidity, oh the hubris!

Best regards to all.

silvercar

FlorayG said:

First of all, the landlord can't just move in with the tenant unless the tenant is fully willing to give up their tenancy.
Second, the tax is due on all past payments even if they do 'fix things' this way ( they can earn up to £7,000 a year tax free from a lodger)
Third, why not call it rent and pay tax on it and make it up to an amount they can afford to pay tax on and still have enough to pay the mortgage? Is the relative living there able to pay? If not, could he get benefits that will cover it?
Fourth, if they sell the home, where will the relative go? Council won't rehouse someone voluntarily homeless.
Fifth, if it's 'gifts' and not 'rent' ( which it isn't, but just pointing this out) there is a limit to how much a person can gift every year without being liable for tax on their estate. I don't know the ins and outs of it but I know the limit is £3,000 a year. So probably SOMEBODY owes tax on the money your friends are being given

First, they can if the landlord agrees. I don’t see how morally the tenant can refuse in this situation.
Second. Agreed, rent a room limit of £7,500 a year.
Third, because the tax laws in this country on mortgage interest mean that the landlord could be heavily taxed even if the mortgage is only just covered by the rent.
Fourth. Council seem to know be housing people once the eviction date is reached. Round my way at least, the council isn’t waiting for bailiffs. Though it may be area dependent.
Fifth. Not true, anything over £3k would form part of the receivers estate if they passed within 7 years, but there is nothing to stop a gift being made.

Grumpy_chap

This should be changed to a BTL mortgage.

The "gift" is not a "gift" but is rent.  Proper accounts should be kept.  Income tax should be paid (right back to the beginning of this arrangement).

The tenant is not a lodger so rent a room relief does not apply.

When the property is sold, CGT will apply.

Hoenir

pac-man said:

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.

That's mortgage fraud. In breach of the terms and conditions of the loan. Failure to declare the rental income to the HMRC could be extremely damaging financially. The penalties, interest and tax due over time will simply grow larger. 

Legitimise the arrangement or just pray that the matter doesn't come to light. 

pac-man

Oh lord. This is worse than I thought. Thanks for your replies. Can I just clarify:

1] the ‘gift’ would definitely be seen as ‘rent’ by hmrc and tax is due on the money already given even though it is insufficient to cover the mortgage and no profit (only loss) has been made?
2) By moving out and living elsewhere leaving the relative to live in the home on their own, despite the mortgage company knowing that the relative lives there, this could be seen as mortgage fraud?
3] Even if my friend leaves their kids and partner in the family home to live with this relative, tax is still due on money already received until now?
4) If they moved in with the relative on a permanent basis, from that point the relative could be seen as a lodger and greater income allowed without incurring tax?
5) The relative has no assets, so the ‘gift’ is from their income only and there will be no IHT as they have nothing to leave my friend and have always made this clear.
6) If the house were sold CGT might be payable on any increased value in the time they have held ownership? Even though it will only pay off debt incurred to buy the house and pay off the mortgage, so there is no actual ‘gain’? That’s unless the friend leaves their marital home, moves back in and makes it their permanent residence again?

Help! What would you advise them to do moving forwards?