Tax Implications on this 'Buy to Let' Scenario
Discussion
The parents of a friend got into a bit of a mess with their finances after the businesses they ran collapsed. From what I hear they were never that great with money but had done fairly well through a series of small business which for various reasons all hit the wall.
Long story short, they ended up with very little out of it, lost the house and a poor credit rating.
Fast forward a couple of years and they have enough for a house deposit but such a poor credit rating they cannot get anything.
My friend steps in and buys the house they wanted in her own name as a BTL using the parents deposit. (My friend is a homeowner and has a fairly decent salary). Every month her parents transfer the funds to cover the mortgage payment direct debit. This has been going on for a couple of years now, all ticking over fine.
All of the above was done with good intentions, the only thing that is slightly not legit is I think there is some small print in the mortgage that the BTL should not be let to family members. The thing that worries me is that my friend should now be declaring the 'income' from the BTL and will be taxed on this income, regardless of the fact that she is not in profit.
Her view is, surely not as she has not done it to make money and 'surely' someone will see the scenario for what it is. My view is, she is now facing a potential tax bill for helping her parents out of a sticky situation.
Thoughts please?
Long story short, they ended up with very little out of it, lost the house and a poor credit rating.
Fast forward a couple of years and they have enough for a house deposit but such a poor credit rating they cannot get anything.
My friend steps in and buys the house they wanted in her own name as a BTL using the parents deposit. (My friend is a homeowner and has a fairly decent salary). Every month her parents transfer the funds to cover the mortgage payment direct debit. This has been going on for a couple of years now, all ticking over fine.
All of the above was done with good intentions, the only thing that is slightly not legit is I think there is some small print in the mortgage that the BTL should not be let to family members. The thing that worries me is that my friend should now be declaring the 'income' from the BTL and will be taxed on this income, regardless of the fact that she is not in profit.
Her view is, surely not as she has not done it to make money and 'surely' someone will see the scenario for what it is. My view is, she is now facing a potential tax bill for helping her parents out of a sticky situation.
Thoughts please?
PurpleFox said:
The parents of a friend got into a bit of a mess with their finances after the businesses they ran collapsed. From what I hear they were never that great with money but had done fairly well through a series of small business which for various reasons all hit the wall.
Long story short, they ended up with very little out of it, lost the house and a poor credit rating.
Fast forward a couple of years and they have enough for a house deposit but such a poor credit rating they cannot get anything.
My friend steps in and buys the house they wanted in her own name as a BTL using the parents deposit. (My friend is a homeowner and has a fairly decent salary). Every month her parents transfer the funds to cover the mortgage payment direct debit. This has been going on for a couple of years now, all ticking over fine.
All of the above was done with good intentions, the only thing that is slightly not legit is I think there is some small print in the mortgage that the BTL should not be let to family members. The thing that worries me is that my friend should now be declaring the 'income' from the BTL and will be taxed on this income, regardless of the fact that she is not in profit.
Her view is, surely not as she has not done it to make money and 'surely' someone will see the scenario for what it is. My view is, she is now facing a potential tax bill for helping her parents out of a sticky situation.
Thoughts please?
You're right - your friend has gotten herself into a big hole by trying to do the right thing.Long story short, they ended up with very little out of it, lost the house and a poor credit rating.
Fast forward a couple of years and they have enough for a house deposit but such a poor credit rating they cannot get anything.
My friend steps in and buys the house they wanted in her own name as a BTL using the parents deposit. (My friend is a homeowner and has a fairly decent salary). Every month her parents transfer the funds to cover the mortgage payment direct debit. This has been going on for a couple of years now, all ticking over fine.
All of the above was done with good intentions, the only thing that is slightly not legit is I think there is some small print in the mortgage that the BTL should not be let to family members. The thing that worries me is that my friend should now be declaring the 'income' from the BTL and will be taxed on this income, regardless of the fact that she is not in profit.
Her view is, surely not as she has not done it to make money and 'surely' someone will see the scenario for what it is. My view is, she is now facing a potential tax bill for helping her parents out of a sticky situation.
Thoughts please?
She will be taxed at her marginal income tax rate (?40% ?45% ??60%) for the whole of the rental income less expenses (repairs e.t.c). Mortgage interest is NOT included in the expenses now so this will really hurt. She will get a 20% rebate on the Mortgage Interest cost (Not the capital element of the mortgage repayment) but this isn't great if her marginal income tax rate is 40%+.
She could bury her head in the sand and hope the tax man will not notice but this would not be wise. She would be best advised to register onto the HMRC self assessment tax return system and get it sorted either with the help of an accountant or a good book/website on this stuff.
This may sound picky but surely if a mortgage was obtained based on a certain "deposit" being provided by the property owner then how come the deposit was actually a loan from someone else? Was that all declared in the mortgage application?
It sounds as though your friend may need to make absolutely sure this project stays on the rails (including tax/HMRC) because it would be unfortunate if any accusations of financial fraud were made at a later date.
It sounds as though your friend may need to make absolutely sure this project stays on the rails (including tax/HMRC) because it would be unfortunate if any accusations of financial fraud were made at a later date.
So she's renting to her parents ?
Is it an interest only mortgage or a repayment mortgage?
Do they have a AST ? Have all the deposits and prescribed info been done to set it up as an AST ? Is her insurance a BTL insurance too?
Has she done a right to rent check, taken copies of thier passports etc.
I ask because unless she's done that properly, she's not really being a proper landlord.
Obviously if they are paying the full cost of a repayment mortgage, the money above the interest is profit and subject to tax, and now with tax as it is, unless you are a basic rate tax payer, there's also tax due on the interest which isn't treated as a business cost.
Here's what she needs to do. In my humble opinion.
At the earliest opportunity convert it to a residential interest only mortgage.
Allow her parents to live there rent free, if they cover the utilities and the like. Allow her parents to gift her money anytime they like. No tenancy agreements, just verbal agreement.
If that money covers the interest and the insurance them that would be good wouldn't it. And convinient.
If they want to save up a pot of money and gift it to her in a will at a later date, and that money happens to pay off the capital owing, then that would be great too.
Note that my solution only works if there's a lot of trust.
By going interest only, they can see she's not building capital at thier expense, other than house prices rising. She doesn't need to ever pay off the house, because once they no longer need it, she can flog it.
Is it an interest only mortgage or a repayment mortgage?
Do they have a AST ? Have all the deposits and prescribed info been done to set it up as an AST ? Is her insurance a BTL insurance too?
Has she done a right to rent check, taken copies of thier passports etc.
I ask because unless she's done that properly, she's not really being a proper landlord.
Obviously if they are paying the full cost of a repayment mortgage, the money above the interest is profit and subject to tax, and now with tax as it is, unless you are a basic rate tax payer, there's also tax due on the interest which isn't treated as a business cost.
Here's what she needs to do. In my humble opinion.
At the earliest opportunity convert it to a residential interest only mortgage.
Allow her parents to live there rent free, if they cover the utilities and the like. Allow her parents to gift her money anytime they like. No tenancy agreements, just verbal agreement.
If that money covers the interest and the insurance them that would be good wouldn't it. And convinient.
If they want to save up a pot of money and gift it to her in a will at a later date, and that money happens to pay off the capital owing, then that would be great too.
Note that my solution only works if there's a lot of trust.
By going interest only, they can see she's not building capital at thier expense, other than house prices rising. She doesn't need to ever pay off the house, because once they no longer need it, she can flog it.
Pit Pony said:
At the earliest opportunity convert it to a residential interest only mortgage.
This would be a good solution but she would need to be earning enough to cover both her own mortgage as well as the mortgage on this second "home". I would have thought that an Interest only residential mortgage would be tough to get nowadays but I am sure a mortgage broker will be along to confirm either way.
At the moment your friend is in deep s
t as she's probably misleading the mortgage company & almost certainly not declaring correctly with HMRC. It wouldn't take much for them to check bank records & for her to end up having the mortgage withdrawn & the house repossessed if she can't pay it off in a very short period; she'd then find it very difficult to ever get another mortgage. Then HMRC would come after her.
I don't know who to ask to get advice on how to structure the arrangement so it's above board but she's skating on thin ice. Maybe you could ask Sarnie as he's a mortgage expert.
t as she's probably misleading the mortgage company & almost certainly not declaring correctly with HMRC. It wouldn't take much for them to check bank records & for her to end up having the mortgage withdrawn & the house repossessed if she can't pay it off in a very short period; she'd then find it very difficult to ever get another mortgage. Then HMRC would come after her.I don't know who to ask to get advice on how to structure the arrangement so it's above board but she's skating on thin ice. Maybe you could ask Sarnie as he's a mortgage expert.
Thanks for the helpful responses.
She is certainly at the 40% tax rate, possibly even 45%
Not sure if it is interest only or capital and interest. There is a lot of trust - they are a close family and like I said, it was not done with the intention of defrauding anyone. She sees the house as her mum and dads, not hers and I doubt they have thought longer term like inheritance and what to do with her sister(s) etc.
She has absolutely no desire to be a landlord and certainly not her parents landlord. I very much doubt her parents will try to sue her for not protecting a deposit or having an up to date IECR etc.
It would be nice to change to a residential mortgage and gift the money like Pit Pony suggests but I thought having 2 residential mortgages was a no-no (she has her own property mortgaged)? Having said that, surely a mortgage is just a mortgage and the BTL / Residential is just a label that the lender applies and sets the rate accordingly. Having a BTL mortgage doesn't make the house a BTL - that would be the tenancy agreement etc.
The tax implications and how to make it legit for all involved as far as HMRC are concerned is the main priority, the rights and wrongs of the mortgage arrangements in respect of the bank is a secondary issue which I would be far less bothered about.
Thanks again for responses.
She is certainly at the 40% tax rate, possibly even 45%
Not sure if it is interest only or capital and interest. There is a lot of trust - they are a close family and like I said, it was not done with the intention of defrauding anyone. She sees the house as her mum and dads, not hers and I doubt they have thought longer term like inheritance and what to do with her sister(s) etc.
She has absolutely no desire to be a landlord and certainly not her parents landlord. I very much doubt her parents will try to sue her for not protecting a deposit or having an up to date IECR etc.
It would be nice to change to a residential mortgage and gift the money like Pit Pony suggests but I thought having 2 residential mortgages was a no-no (she has her own property mortgaged)? Having said that, surely a mortgage is just a mortgage and the BTL / Residential is just a label that the lender applies and sets the rate accordingly. Having a BTL mortgage doesn't make the house a BTL - that would be the tenancy agreement etc.
The tax implications and how to make it legit for all involved as far as HMRC are concerned is the main priority, the rights and wrongs of the mortgage arrangements in respect of the bank is a secondary issue which I would be far less bothered about.
Thanks again for responses.
It's a bit weird.
Taking the drama out of it, it's a woman who's bought a btl which she's letting her parents stay in. They make some contribution to the dwelling's costs.
I could see a pretty strong case for arguing that there isn't any kind of business going on here either in fact or in law.
Mortgage company? Who knows. Usually as long as the repayments are being made they won't be going looking for any hassle.
It doesn't appear that anyone's financially benefitting from this or losing out from it either.
The woman's got a non-trading btl.
Don't think if it was mine I'd be involving HMRC in it until it actually became an operating BTL.
Taking the drama out of it, it's a woman who's bought a btl which she's letting her parents stay in. They make some contribution to the dwelling's costs.
I could see a pretty strong case for arguing that there isn't any kind of business going on here either in fact or in law.
Mortgage company? Who knows. Usually as long as the repayments are being made they won't be going looking for any hassle.
It doesn't appear that anyone's financially benefitting from this or losing out from it either.
The woman's got a non-trading btl.
Don't think if it was mine I'd be involving HMRC in it until it actually became an operating BTL.
Zoon said:
Can't they change the account that they pay the mortgage from to the parents account?
What would that achieve? The mortgage is still that of the friends, not their parents, so even though is bypassing the friend's account it's still their rental income.Could actually make things worse if the mortgage firm get twitchy about someone else appearing to be paying the mortgage (would expect they'd be looking for this sort of thing as part of their standard anti-money laundering protocols).
Groat said:
It's a bit weird.
Taking the drama out of it, it's a woman who's bought a btl which she's letting her parents stay in. They make some contribution to the dwelling's costs.
I could see a pretty strong case for arguing that there isn't any kind of business going on here either in fact or in law.
Mortgage company? Who knows. Usually as long as the repayments are being made they won't be going looking for any hassle.
It doesn't appear that anyone's financially benefitting from this or losing out from it either.
The woman's got a non-trading btl.
Don't think if it was mine I'd be involving HMRC in it until it actually became an operating BTL.
That's pretty much the size of it and I guess that's exactly the response she would be hoping for but would HMRC agree........who knows?Taking the drama out of it, it's a woman who's bought a btl which she's letting her parents stay in. They make some contribution to the dwelling's costs.
I could see a pretty strong case for arguing that there isn't any kind of business going on here either in fact or in law.
Mortgage company? Who knows. Usually as long as the repayments are being made they won't be going looking for any hassle.
It doesn't appear that anyone's financially benefitting from this or losing out from it either.
The woman's got a non-trading btl.
Don't think if it was mine I'd be involving HMRC in it until it actually became an operating BTL.
Groat said:
It's a woman who's bought a btl which she's letting her parents stay in. They make some contribution to the dwelling's costs.
I could see a pretty strong case for arguing that there isn't any kind of business going on here either in fact or in law.
I don't think that's the right way to look at it. Just because there is no tenancy agreement and legal requirements of resi letting aren't being followed, it doesn't change the fact that the tenants are paying the landlord a monthly rent to occupy the property? If, per OP, the rent is equal to the mortgage payment (i.e. capital and interest), then there is most likely a profit being made and tax arising.I could see a pretty strong case for arguing that there isn't any kind of business going on here either in fact or in law.
PurpleFox said:
That's pretty much the size of it and I guess that's exactly the response she would be hoping for but would HMRC agree........who knows?
Well I'd very much doubt it's the only time this scenario has ever arisen. Person letting their nearest and dearest stay in a property they own. So if it's ever been an issue there'll be case law somewhere on it, but in my opinion it's unlikely because why would HMRC have any interest in a non trading business in the first place? Your friend: "Hello? HMRC? I've bought a property I'm not letting or claiming any expenses on. Do I owe you anything"?
HMRC callcentre person (to colleague): "uhoh Bert, we've got a live one here! Wanna listen in"?
Seriously?
NickCQ said:
I don't think that's the right way to look at it. Just because there is no tenancy agreement and legal requirements of resi letting aren't being followed, it doesn't change the fact that the tenants are paying the landlord a monthly rent to occupy the property? If, per OP, the rent is equal to the mortgage payment (i.e. capital and interest), then there is most likely a profit being made and tax arising.
I'm certainly not an accountant, but I can see the payments being made (unless of course there's an agreement in place and a properly contracted tenancy in operation) as something other than 'rent'. I mean, is bunging your adult kid a few bob to help with their bills paying them income they should be declaring or even something that should be getting declared as a gift?
More interesting to me is whether or not the dwelling should be subject to the usual legal requirements of a non-owner occupied dwelling given that its occupants are immediate family and not occupying on a tenant/landlord or any commercial basis?
Should it be getting gas certificated etc etc etc.?
Again, I don't think so, but I don't KNOW so.
Groat said:
I'm certainly not an accountant, but I can see the payments being made (unless of course there's an agreement in place and a properly contracted tenancy in operation) as something other than 'rent'.
I mean, is bunging your adult kid a few bob to help with their bills paying them income they should be declaring or even something that should be getting declared as a gift?
More interesting to me is whether or not the dwelling should be subject to the usual legal requirements of a non-owner occupied dwelling given that its occupants are immediate family and not occupying on a tenant/landlord or any commercial basis?
Should it be getting gas certificated etc etc etc.?
Again, I don't think so, but I don't KNOW so.
It all depends on whether HMRC were born yesterday or not.I mean, is bunging your adult kid a few bob to help with their bills paying them income they should be declaring or even something that should be getting declared as a gift?
More interesting to me is whether or not the dwelling should be subject to the usual legal requirements of a non-owner occupied dwelling given that its occupants are immediate family and not occupying on a tenant/landlord or any commercial basis?
Should it be getting gas certificated etc etc etc.?
Again, I don't think so, but I don't KNOW so.
You bought a house? Your parents live in it? They happen to give you every month a sum of money that is very similar to the mortgage repayments?
Clearly, they're just doing that out of the goodness of their hearts, and it's definitely not a rent payment of any kind. FFS.
It's not really a gift here as one party is providing the property and the other is paying a rent for it. If there is a gift changing hands it's the difference between the market rent and the mortgage payment that's being covered.
I am sure this sort of thing goes on all the time... I think the only point where it really becomes an issue is when/if the mortgage needs to be refinanced, and the property owner makes a false declaration to the lender about how the property is being used.
I am sure this sort of thing goes on all the time... I think the only point where it really becomes an issue is when/if the mortgage needs to be refinanced, and the property owner makes a false declaration to the lender about how the property is being used.
PurpleFox said:
The tax implications and how to make it legit for all involved as far as HMRC are concerned is the main priority, the rights and wrongs of the mortgage arrangements in respect of the bank is a secondary issue which I would be far less bothered about.
Thanks again for responses.
She is a landlord - end of story. She is therefore obliged to return the rental profits she is making from the property each year to HMRC under Self Assessment and pay any Income Tax arising on the rental property.Thanks again for responses.
The comment above that mortgage interest is no longer allowable as a tax deductible cost is not correct. It is, but it is severely restricted these days in that tax relief can only be reclaimed on 25% of the annual interest AND OTHER FINANCIAL CHARGES - and tax relief is also restricted to the taxpayer's 20% tax rate. In other words, they get no tax relief at higher rates of income tax.
When did this individual start renting out the property?
Of course, if and when she disposes of the property, she will be subject to Capital Gains Tax on any profit on disposal.
Eric Mc said:
deckster said:
Clearly, they're just doing that out of the goodness of their hearts, and it's definitely not a rent payment of any kind. FFS.
Absolutely and totally 100% incorrect.And the one thing she 100% ISN'T is a landlord, unless she's trans identifying as male.
More seriously, I'm going to phone Landlord Registration after 2 when the switchboard reopens and ask whether such a property would require to be registered. Owned but occupied by parents without tenancy agreement or any tenancy contract in place, and with no intention to change that to 'normal' tenant occupancy either by the parents or anyone else.
If it DOES require registration then it's because she's deemed a landlord. If it doesn't then she ain't. Not by law at least, because law does require all landlords to be registered.
NickCQ said:
It's not really a gift here as one party is providing the property and the other is paying a rent for it. If there is a gift changing hands it's the difference between the market rent and the mortgage payment that's being covered.
I am sure this sort of thing goes on all the time... I think the only point where it really becomes an issue is when/if the mortgage needs to be refinanced, and the property owner makes a false declaration to the lender about how the property is being used.
I don't think it's a gift, but I also don't think there's a rental contract, or a tenancy - even a verbal one - in place here either. I am sure this sort of thing goes on all the time... I think the only point where it really becomes an issue is when/if the mortgage needs to be refinanced, and the property owner makes a false declaration to the lender about how the property is being used.
I think the whole intent behind the purchase of the dwelling was to provide housing for parents in straitened circumstances, and 100% not to operate a letting concern or any commercial letting activity.
It may well be in the future that changes and she decides to operate a letting concern with all the legalities that brings with it. But at the moment she's a person letting her parents live in a house she owns and any monies she is receiving are neither by contract nor by any other formal agreement, and are merely goodwill payments from parents to child.
I think the mortgage could have been set up better, but that's a different issue.
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