Rental Income or not!

Elizabeth_T_2

Rental Income
I'm new to this so hope this is ok.....here goes....
We are buying a house specifically for daughter & family to live in, they have a limited income and we don't intend charging them the going rate for rent.I imagine we could get £500 a month but they will probably/possably pay about £250.....No mortgage on the property, we are regarding it as a long-term investment, or perhaps they can buy it from us some time in the future(!).....anyway...are we "allowed" to undercharge rent in the eyes of the inland revenue? Are they able to live there rent free, or is it some lind of benefit in kind......don't want to come unstuck with the taxman.......help, advise, views please.....

save4u

Briefly-
1. You can charge any amount you like and this is the income that is declared to the IR.
2. This is offset by any 'running/maintenence' expenses you incur on the property.
3. This property is treated as a separate activity and ring-fenced in your tax return.
4. Separate 'accounts' need to be kept.
5. Losses can be carried forward and tax is payable at your marginal rate on profits
6. This activity must be declared to the IR and included in your tax annual return.

Hope that is helpful, if you need more help email me

MJSW

5. Losses can be carried forward and tax is payable at your marginal rate on profits

Losses can't be claimed if the rental income isn't at full market rent. If rent isn't at a commercial level, then the deductible expenses are restricted to the amount of rent receivable. Consequently there would be neither a gain nor a loss, and the excess expenses can't be carried forward.

chicklet_2

If you are intending to rent the property to your daughter, (and thus receive "rental income"), be aware that you must charge at least a peppercorn rent in order to be able to set the tenancy up as an assured shorthold tenancy.
This is the standard form of tenancy now, further to housing act 1988, amended 1996.

Hope it goes well for you.

MaryC

Re the losses made, strictly they can be carried forward but can only be offset against future profits on that property to that tenant. Not sure if you would ever make that profit in practice though

MJSW

Mary, on what basis do you say that the uncommercial losses can be carried forward against future profits from the same property and tennant? The Inland Revenue say that they can't.

From IR150:

"257.Unless you charge a full market rent for a property (and impose normal market lease conditions) it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes (paragraph 122). So, strictly, they can’t be deducted in arriving at your rental business profits. Deductions may also be denied by the bar on relief for the maintenance of the taxpayer’s family. Hence they are not allowable expenses.

258.However, if you let a property below the market rate to, say, a relative (as opposed to providing it rent free), you can deduct the expenses of that property up to the rent you get from it. This means that the uncommercially let property produces neither a profit nor a loss but the excess expenses cannot be carried forward to be used in a later year."