Parents moving into second home

saajan_12

Jussa1970 said:

So just to clarify.
my wife and I are purchasing the house in our name. (Because the parents cannot get a mortgage)
the parents are gifting the deposit and all expenses to purchase the house, but as mentioned it’s in my wife and my name.
they will be moving into the house and paying council tax, energy bills etc.
We have to pay the mortgage obviously as it’s in our name.
so to cover the mortgage costs the parents will be gifting money to assist with this.
it cannot be any clearer really in what I’m trying to explain.
I’m only trying to clarify whether HMRC can come looking for me for not declaring a rental that is in fact an ongoing gift by my parents.

The deposit / initial expenses they gift you would be relevant for care costs and inheritance tax.
- If their total estate including that gift exceeded the IHT threshold then they'd need to pay tax, if not then no IHT.
- If they need care, then that gift would be taken into account, so they might need to self fund some of their costs. 
However this all would be the same or worse if they held on to that amount of money and didn't gift it to you, so from  an IHT perspective, no harm in doing this. 

The monthly £800 'gift' to you (in return for living in a property you own) is the same as the £x your employer gifts you (in return for doing work). i.e. its rent not a gift, and you'd be liable for income tax on this amount. Your mortgage cost would only get a small tax relief, not deductible as expenses. This is clear cut. 

laidbackgjr

Jussa1970 said:

I’m only trying to clarify whether HMRC can come looking for me for not declaring a rental that is in fact an ongoing gift by my parents.

Calling it a 'gift' doesn't change what it is by tax legislation - it's rent. So yes HMRC could come after you for not declaring the rental income and paying any tax due, worse case is they view it as deliberate tax evasion with potential criminal prosecution, most likely be viewed as tax avoidance and you'd have to pay up plus hefty penalties.

Jussa1970

So just to clarify, we’ll buy the house as a second home, not a buy to let.
i assume this must change things considerably?
I mean we could actually charge the parents £7500 a year tax free (bedroom rental) without gifting if I’m not mistaken?

saajan_12

Jussa1970 said:

So just to clarify, we’ll buy the house as a second home, not a buy to let.
i assume this must change things considerably?
I mean we could actually charge the parents £7500 a year tax free (bedroom rental) without gifting if I’m not mistaken?

There's no distinction, no place where you state your intended purpose for the property (other than perhaps for your lender, but that's irrelevant to the legal and tax position).

£7500 is for rent a room scheme, where you specifically have to be living in the property as your main residence and sharing the kitchen, bathroom, etc.  But then your current home would not be your main residence and you open up capital gains etc on that. 

Again very clear cut, its the same as tax evasion if you pretend otherwise. If you're open to it, there may well be other arrangements that could work instead and not be so tax intensive.. 

Jussa1970

I cannot understand how this can be seen as tax evasion.
so basically all the houses in the UK where multiple families live in one house and everybody contributes to the rental could be seen as tax evasion as well?
parents moving into a second home rent free and giving multiple gifts a year - not sure how it can be proven that the gifts are specifically for rental or covering mortgage costs?

_Penny_Dreadful

Jussa1970 said:

I cannot understand how this can be seen as tax evasion.
so basically all the houses in the UK where multiple families live in one house and everybody contributes to the rental could be seen as tax evasion as well?
parents moving into a second home rent free and giving multiple gifts a year - not sure how it can be proven that the gifts are specifically for rental or covering mortgage costs?

How in your head are you justifying that your parents are living rent free in this second property when their occupation is dependent on making you multiple gifts a year? If it walks like a duck and quacks like a duck it’s a duck. Rental income is subject to income tax. 

Where does the £7,500 rent a room scheme allowance come into the equation? Shall you be living in this property with your parents and renting them a room? 

Multiple families living in one property would quite likely be a HMO or are you actually referring to multi-generational households where it’s one family?

I think your largest stumbling block is going to be getting a mortgage for this enterprise in the first place. Not many lenders will be accept gifted deposits from people who are then going to live in the property. 

lisyloo

Jussa1970 said:

I cannot understand how this can be seen as tax evasion.
so basically all the houses in the UK where multiple families live in one house and everybody contributes to the rental could be seen as tax evasion as well?
parents moving into a second home rent free and giving multiple gifts a year - not sure how it can be proven that the gifts are specifically for rental or covering mortgage costs?

In the first situation the landlord would have to have to declare that rent as income.
If the landlord did not then that would be tax evasion.
They are not giving each other money, they are paying a share of rent.

Is there a long history of your parents giving you £800 per month in gifts?
If it's in return for living in a property you own then they are paying rent and you are their landlord.
There are implications for stamp duty (second property), income tax (rent), Capital gains tax (second property) and IHT (if their circumstances changes such as a new marriage).

If you don't accept the free "advice" you're getting on here which appears to be a consensus then I'd suggest you pay a professional. 

Bookworm105

p00hsticks said:

Bookworm105 said:

Jussa1970 said:

Maybe this forum is the wrong one to ask?
I was just asking about inheritance tax.
if my parents gifted me money every month to pay for a mortgage in the second home I bought (because they’re living in it) surely I wouldn’t have to pay inheritance tax on that even if they died in 7 years because their estate doesn’t have any money in it?

in IHT terms it is a gift with reservation of benefit as in return for their money they benefit from the use a house they do not themselves own 
As a GWR. the gift is deemed to still form part of their estate, ie the 7 year rule does not apply to a GWR

However, as you have repeated several times, if their total estate (including successive gifts) is below the IHT threshold then obviously there is no IHT to pay. So yes, they can buy your house for you and you can treat it as an early inheritance. It is certainly not liable for income tax for you as it is a gift, not your income.

Describing the payment as 'a gift to cover the mortgage' strikes me as rather misleading - it;s actually rent for renting the property. No-one would consider that paying a landlord rent for living in a property was a gift to the landlord for the purposes of IHT, and providing the rent is a reasonable one for the market I'm not convinced that the fact that the landlord is a relative would make a difference. 

But as I opened with, I'm not an expert so may be completely wrong - happy to be corrected if so.

I misread, you are correct, it is not relevant for IHT

in terms of OP's mortgage they would need a regulated BTL mortgage as that is the type intended for letting to family members. 
What Is A Regulated Buy To Let Mortgage?

In terms of OP's income tax position on the rent received, the rent paid by relatives would need to be full market rate for that as though it were occupied by non relatives on the open market.
If they pay less than market rate then OP's tax position is slightly different in terms of how to calculate their taxable rental profit as it is deemed to be a property not let at a "commercial" rent

PIM2130 - Deductions: main types of expense: properties not let at a commercial rent - HMRC internal manual - GOV.UK

Bookworm105

Jussa1970 said:

So just to clarify, we’ll buy the house as a second home, not a buy to let.
i assume this must change things considerably?
I mean we could actually charge the parents £7500 a year tax free (bedroom rental) without gifting if I’m not mistaken?

you could try and get a second home mortgage but you would be lying on your mortgage application regarding who would occupy it. Depends on your moral compass (which so far seems somewhat opportunistic and wild), technically you'd breach mortgage terms and could face lender sanction.

a regulated BTL mortgage is based on your personal income multiple just the same as a second home mortgage, but the former would cover your exact scenario - parents who pay you rent 

you will not yourself be living in the property, so claiming rent a room would put you firmly into deliberate (criminal) tax evasion, not just tax avoidance. 

vic_sf49

Regardless of all the excellent info everyone else has provided, can you even get a mortgage, if you're relying on that £800 gift each month?