‘Renting’ to family

FlorayG

1. Yes
2. Not sure about this one, I'm only a landlord. Does the mortgage company know that the house owner and mortgage payer doesn't live there now?
3. Absolutely yes. What is 'the family home'? you haven't explained the house owners situation. Also, he can't just move in without the tenant's giving up the tenancy, which I suspect won't be a problem but you never know. The law is on the tenant's side.
4. Yes, as long as it's the house owner living there permanently 

What would I do? Have a long talk with the tenant explain exactly the mess they have got themselves into and ask him if he would be OK with giving up the tenancy and becoming a lodger (note; a lodger must share some facilities of the house e.g. bathroom, if they have a completely self-contained area and separate entrance that's not lodgings)

pac-man

FlorayG said:

1. Yes
2. Not sure about this one, I'm only a landlord. Does the mortgage company know that the house owner and mortgage payer doesn't live there now?
3. Absolutely yes. What is 'the family home'? you haven't explained the house owners situation. Also, he can't just move in without the tenant's giving up the tenancy, which I suspect won't be a problem but you never know. The law is on the tenant's side.
4. Yes, as long as it's the house owner living there permanently 

What would I do? Have a long talk with the tenant explain exactly the mess they have got themselves into and ask him if he would be OK with giving up the tenancy and becoming a lodger (note; a lodger must share some facilities of the house e.g. bathroom, if they have a completely self-contained area and separate entrance that's not lodgings)

3) The ‘family home’ is where the friend currently lives with their partner and the partner’s children as a family unit. While the children (under age 18) are considered my friend’s children also, they actually have no legal parental responsibility for them as they are from the partner’s previous relationship. The family home is in the partners name only, not my friend’s. They’d lived there many years already before my friend was on the scene. The kids see my friend as their parent also. Friend fulfils that role to a greater extent that the other non resident bio parent.

The home the relative lives in is owned by my friend only. The idea was that they had something of their own. The partner was reported to be in agreement, but I’m not too sure how much they were consulted about what was happening along the way, the financial impact on them as a family or how much they took on trust. My friend is normally very intelligent, kind and caring but I also suspect that this was an impulsive move that’s now biting them in the bum by not having thought through the detail enough from the start.

Grumpy_chap

pac-man said:

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? 

(1) Yes.

(2) Yes.

(3)  That is not clear.  Who is leaving their family and who is moving in where?  Tax will be liable on the rent received to date.

(4)  Is the Tenant amenable to someone moving in with them?  The AST will need to be ended and the current Tenant become a Lodger, then rent a room relief may be available.  Rent a Room Relief may or may not result in lower tax liability - it all depends on the income and allowable expenses.

(5)  There is no "gift" - there is only rent.

(6)  CGT will be payable for all the period that the house was owned but not lived in (PPR) by the owner.  If the owner leaves their marital home to live with the Tenant (subject to (4)), is the owner separating from spouse?  A married couple can only have one PPR.

Next advice - pay an Accountant to sort out the historical tax returns and then pay whatever bill is due.  A pro-active and apologetic approach may avoid penalties.

pac-man

Grumpy_chap said:

pac-man said:

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? 

(1) Yes.

(2) Yes.

(3)  That is not clear.  Who is leaving their family and who is moving in where?  Tax will be liable on the rent received to date.

(4)  Is the Tenant amenable to someone moving in with them?  The AST will need to be ended and the current Tenant become a Lodger, then rent a room relief may be available.  Rent a Room Relief may or may not result in lower tax liability - it all depends on the income and allowable expenses.

(5)  There is no "gift" - there is only rent.

(6)  CGT will be payable for all the period that the house was owned but not lived in (PPR) by the owner.  If the owner leaves their marital home to live with the Tenant (subject to (4)), is the owner separating from spouse?  A married couple can only have one PPR.

Next advice - pay an Accountant to sort out the historical tax returns and then pay whatever bill is due.  A pro-active and apologetic approach may avoid penalties.

3) Friend leaves their partner and their kids to move in with relative. Another option is that the partner of my friend sells the family home ( which is their main residence) and 6 people live in my friend’s 2 bed property for a while (can’t see that working though, poor kids!). 

6) I believe my friend may have considered splitting up with the partner as a way of getting out of the mess for everyone involved (by creating a different kind of mess). I can’t believe they have even suggested that as an option tbh. 

My friend needs to grow a pair I think and deal with the issues head on.

I think I agree with professional help being needed as it’s beyond me!

Thank you all

saajan_12

pac-man said:

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? - Yes, the mortgage payments partly pay off the capital, so that's not a cost. The rest of the mortgage payment is interest which the government have decided should only be given partial relief. 

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? - Technically yes. 

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? - Of course, what happens in the future doesn't undo the tax evasion of the past. 

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? - Yes the first £7.5k is tax free, ie 1.5-3k saving depending on the tax band over a year, potentially less as no expenses can be claimed on lodger income. This seems like an extreme step to upend their life for a tax saving. 

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. - its not about what they leave to the friend, its based on their total assets. But yes if their total assets are below the threshold then there's no IHT implication. 

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? Of course, mortgage is usually less than the purchase price, which isn't taken off when calculating the gain anyway. If there is an increased value, this is a profit and is taxed. 

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

Comments in line. Many of your 'even if' questions sound odd, while the tax sounds perfectly reasonable to me. 

Grumpy_chap

pac-man said:

3) Friend leaves their partner and their kids to move in with relative. Another option is that the partner of my friend sells the family home ( which is their main residence) and 6 people live in my friend’s 2 bed property for a while (can’t see that working though, poor kids!). 

6) I believe my friend may have considered splitting up with the partner as a way of getting out of the mess for everyone involved (by creating a different kind of mess). I can’t believe they have even suggested that as an option tbh. 

My friend needs to grow a pair I think and deal with the issues head on.

I think I agree with professional help being needed as it’s beyond me!

Thank you all

Unless this marriage is at an end, suggesting to leave a happy family for the sake of avoiding some future income tax seems extreme - were they being serious when this was said?

If the idea is to "fake" a separation, that is just digging a deeper whole.  To date, it seems as though the owner of the property has fallen foul of ignorance which is not an excuse in the eyes of the law, but to create a false scenario would go beyond ignorant error and into the realms of fraud.

The past income tax and CGT liabilities arising to date cannot be voided and still need to be resolved.  The CGT gets resolved on a proportion of time basis as and when the property is actually sold.

sheramber

Capital Gains tax is calculated on the increase in value between purchase and sale less allowable expenses such as buying/ selling costs.

The outstanding  mortgage is not an allowable expense. CGT is payable regardless of any outstanding mortgage.

If your friend moved back in, CGT for the time he didn’t live there is still payable when the house is eventually sold. Relief is given for the time he does live there. 

He does need to get expert advice before he makes matters worse. 

pac-man

Grumpy_chap said:

pac-man said:

3) Friend leaves their partner and their kids to move in with relative. Another option is that the partner of my friend sells the family home ( which is their main residence) and 6 people live in my friend’s 2 bed property for a while (can’t see that working though, poor kids!). 

6) I believe my friend may have considered splitting up with the partner as a way of getting out of the mess for everyone involved (by creating a different kind of mess). I can’t believe they have even suggested that as an option tbh. 

My friend needs to grow a pair I think and deal with the issues head on.

I think I agree with professional help being needed as it’s beyond me!

Thank you all

Unless this marriage is at an end, suggesting to leave a happy family for the sake of avoiding some future income tax seems extreme - were they being serious when this was said?

If the idea is to "fake" a separation, that is just digging a deeper whole.  To date, it seems as though the owner of the property has fallen foul of ignorance which is not an excuse in the eyes of the law, but to create a false scenario would go beyond ignorant error and into the realms of fraud.

The past income tax and CGT liabilities arising to date cannot be voided and still need to be resolved.  The CGT gets resolved on a proportion of time basis as and when the property is actually sold.

I think the idea of leaving was just thrashing ideas around while in distress (I hope!). I doubt the partner would have them back if they did this in reality. Who would, when it would be unsettling the kids and leaving what appeared until this point to be a very happy relationship?! I’d therefore see the split as being permanent if they went ahead, so probably not fraudulent but yes, an extreme one. 

silvercar

Is friend actually married to his partner? If not, it all becomes easier as unmarried partners can each have their own home, whereas a married couple can only have one principle residence between them for tax purposes.

pac-man

silvercar said:

Is friend actually married to his partner? If not, it all becomes easier as unmarried partners can each have their own home, whereas a married couple can only have one principle residence between them for tax purposes.

They are married. Short marriage so far. Both houses bought pre wedding.