Can my sister be the agent and collect rental income tax free?

IAMIAM

My sister is a stay at home mum and I am tempted to keep hold of my property and rent the house out on a permanent basis. I am a higher rate tax paper, currently pay as much into my pension to become a basic rate tax paper. The rental income of say 12k a year will cause me a headache and more tax to pay!

Is it legal to have my sister as the property manager and effectively collect the £1k a month minus the agent fee and the difference is her fee for managing the property? She doesn't pay any tax at the moment

If not, I just do not get how people invest or keep hold of rental properties anymore...

Single Income 60k,
House 250k vs Mortgage 150k - so currently well below BTL LTV Value
Rental would be 1000-1200k a month.

All the calculators online suggest I would be net loss for years and years 

Newbie_John

There is a lot of expenses you can make:
Other types of expenses you can deduct if you pay for them yourself are:

general maintenance and repairs to the property

water rates, council tax, gas and electricity

insurance, such as landlords’ policies for buildings, contents and public liability

costs of services, including the wages of gardeners and cleaners

letting agent fees and management fees

legal fees for lets of a year or less, or for renewing a lease for less than 50 years

accountant’s fees

rents (if you’re sub-letting), ground rents and service charges

direct costs such as phone calls, stationery and advertising for new tenants

vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

Does your mortgage allow renting it out?
Your sister would have to do self assessment as self employed.

IAMIAM

Thanks for this. Could all of the above equate to 1k per month in rental income? Asking for friends...

GDB2222

IAMIAM said:

Thanks for this. Could all of the above equate to 1k per month in rental income? Asking for friends...

I think you are worrying too much about the tax position. Start with the question of whether keeping a BTL property is a good investment. If so, tax is just one of the many factors to take into account. 

You can employ your sister as property manager, if that is a genuine employment, at the usual going rate, which is about 10% of the rent. She will need to keep detailed records and complete a self assessment tax return each year. It’s a fair bit of work for a tax saving of say £500 a year.  

Presumably, you must like your sister a lot, to pay £1000 a year for managing your property, as she has no experience or qualifications to do so. Or, were you thinking that she would slip the money back to you, effectively making this a tax fraud? Incidentally, even if the arrangement is completely genuine, it will look suspicious to the tax inspector. 

Grumpy_chap

IAMIAM said:

My sister is a stay at home mum and I am tempted to keep hold of my property and rent the house out on a permanent basis. I am a higher rate tax paper, currently pay as much into my pension to become a basic rate tax paper. The rental income of say 12k a year will cause me a headache and more tax to pay!

Is it legal to have my sister as the property manager and effectively collect the £1k a month minus the agent fee and the difference is her fee for managing the property? She doesn't pay any tax at the moment

If not, I just do not get how people invest or keep hold of rental properties anymore...

Single Income 60k,
House 250k vs Mortgage 150k - so currently well below BTL LTV Value
Rental would be 1000-1200k a month.

All the calculators online suggest I would be net loss for years and years 

Does your sister have the knowledge and skills to act as your professional Letting Agent?  Is she aware of the obligations she would be taking on?  Does she have access to reliable tools for marketing the property, vetting prospective tenants etc?  Does she have contacts for reliable tradespersons that will respond to her request to attend to matters arising at the property in a timely manner?  Does she want to be a sole trader Letting Agent?  

My experience amongst acquaintances is that those who have experienced the worst outcomes in terms of tenants and payment / property damage have been those that do the letting privately rather than via a Letting Agent.

Anyway, let's suppose the property lets at market value £1k per month.  So £12k per year.
You will pay your sister 15% (£1.8k) of that for her effort at managing the property.
Your Letting Agent then pays you the balance £10.2k
You can deduct from that any genuine expenses - property insurance, maintenance costs and such like.
You have an increased taxable income of whatever the balance is.

The alternative would be to employ an established Letting Agent at the same 15% fee + VAT, so £2,160 gross.
Your balance received is £360 less per year.
Your sister avoids all the hassle.

If your objective is to remain a basic rate tax payer, you can pay more into your pension and use the nett rental income to supplement that back to your ongoing living costs.
Obviously, the rental income per se is not considered eligible earnings so cannot be directly used as pension contributions.
But, you can contribute all of the £60k gross salary to pension should you so wish.  If you then lived off the £10k or so from the rental, that would work from a tax perspective.  
Probably not optimised as one assumes you would want to keep at least sufficient to use up all your personal allowance.

Veteransaver

Looks like tax avoidance to me.
However Isn't your biggest issue that your mortgage interest is barely likely to cover the rent less agency fee?
And then if you are a high rate taxpayer you are not going to get the full relief on mortgage interest anyway.
So the property would barely be making an accounting profit anyway (and you being a high rate taxpayer you'd probably be making an actual cash loss each year too), how are you supposed to pay £1k a month to your sister, you would just be permanently carrying forward a trading loss which likely isn't any use to you anyway.

sheramber

You have it the wrong way round. 

The property is yours,
The  rental income is yours.

If your sister does the work YOU may her a fee  for doing it.  

She does not pay you to work for you. 

That fee is an expense against against your rental income

It can never be her income unless she is  a part owner. 

Your sister would have to register  for self assessment  and submit a tax return  each year declaring her income as an agent if the amount was more than £1000 per year. 

Alternatively, HMRC may consider you are employing her  which involves you in  more work. 

Bookworm105

IAMIAM said:

Is it legal to have my sister as the property manager and effectively collect the £1k a month minus the agent fee and the difference is her fee for managing the property? She doesn't pay any tax at the moment

Single Income 60k,
House 250k vs Mortgage 150k - so currently well below BTL LTV Value
Rental would be 1000-1200k a month.

All the calculators online suggest I would be net loss for years and years 

your wording is somewhat woolly.
She has no entitlement to the £12,000 rent as she is not the beneficial owner of the property

You can pay her a fee for managing the property/tenancy & collecting the rent, but the net profit (rent - fee) is still your tax liability.
she would then have an income of £ fee which may, or may not mean she becomes a taxpayer in her own right for her own income.

As you are a higher rate taxpayer and there is an o/s mortgage, you need to do the sums to decide if letting the property is worthwhile.
The mortgage interest is not a deduction when working out your profit, so you get taxed on a higher than "actual" profit and only get to claim a tax refund at 20%, not 40%, of the mortgage interest cost. Hence some HR taxpayers do indeed make income losses and retain property only for capital gains purposes. That is why the calculators are most likely correct!!!