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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My wife and I are looking to remortgage our home to release

Customer Question

My wife and I are looking to remortgage our home to release equity for the purchase of a second property. My elderly parents would then live there. We would not have any form of rental agreement. My understanding is that there is an inheritance tax rule about 'gifts from normal expenditure', whereby they could give us a regular amount of money, as long as it does not come out of their capital, but only their income (this would indeed be the case), and it does not affect their normal standard of living. Further, as gifts to us, these sums would not be liable to income tax on our side.
Is that true, and possible? Or would HMRC be able to construe that this is a form of rental, and thereby leave us liable to income tax?
I should add that these sums would definitely NOT meet the full amount of our increased mortgage payments - far from it, in fact; but they would make those payments just affordable for us with this 'help'. Thank you.
Submitted: 7 months ago.
Category: Tax
Expert:  TonyTax replied 7 months ago.

Hi.

There is information on gifts out of income here.

A gift out of income would normally be made without any condition. I'm afraid that HMRC would almost certainly see your plan as a potential tax avoidance scheme if they got wind of it. However, given that you would be offsetting the interest on that part of the remortgage used to buy the property against that "rent" for tax purposes, you would probably have no tax to pay, especially if there were other expenses you met as the landlord. If the "rent" paid by your parents will be less than what you would charge commercially, any loss you made (rental income less deductible expenses) would only be deductible from rental profits made from letting the same property to your parents. That is of relevance to those who let more than one property, not you and your wife, right now at least. Take a look here for more information on property let on less than commercial terms. Give that I don't see much of an income tax problem, though I don't have any figures, I'd be inclined to not use the gift out of income idea.

I hope this helps but let me know if you have any further questions.

Customer: replied 7 months ago.
Hi Tony, and many thanks - this is very helpful. I can give some numbers, in case they clarify things. Our remortgage situation actually means we'd have two separate mortgages on our own home (with the same lender), so the mortgage payments for the 'second home' would effectively be identifiable. Those 'second mortgage' payments would be about £1200 a month; our existing mortgage would remain the same as before (about £750 a month). The way we would intend to meet those £1200 payments is by (a) paying half of it ourselves (out of income, and with some economising) and (b) my parents paying the other half. We would anticipate paying the ground rent (£850 per annum on the flat we are interested in), and probably buildings insurance; and my parents would pay council tax and utility bills. I have no particular interest in being a commercial landlord, so I suppose this makes us 'accidental landlords' (though long term I suppose we might end up letting it out commercially). From what you've said, am I right in thinking that because the 'rental' income from my parents would be substantially less than the new mortgage payments, there is therefore no 'income' here to be taxable? And would the ground rent' count as a deductible expense? Thanks again
Customer: replied 7 months ago.
Sorry, me again - just trying to think this through (with my limited understanding!). If I understand correctly, an 'uncommercial' let of this kind should aim to create neither a profit or a loss? Am I missing something to think that this could be achieved by my parents paying us half of [monthly second mortgage payments + ground rent], ie our expenses? (This £635 or so would as much as they could afford anyway.) Or am I misunderstanding what counts as 'expenses' for these purposes? Thanks
Customer: replied 7 months ago.
If I understand http://www.landlordsyndicate.com/knowledge/864/ correctly, the whole thing would be 'tax neutral', so we don't even declare the payments as income on a tax return. But I think maybe it's the expenses side I don't understand in particular. I don't mind if we can't claim anything - though obviously I would claim things if we would be foolish not to! (The wider context of all this is that my parents can't afford flats in our area, hence this plan; and as long as can meet the mortgage payments, we have no interest in 'making money' on this.) I promise I'll stop adding extra comments now!
Expert:  TonyTax replied 7 months ago.

I'll get back to you on this, this morning.

Expert:  TonyTax replied 7 months ago.

You are free to ask as many questions until you are happy you understand your tax position.

Only the interest element of the £1,200 per month mortgage payment would be interest as opposed to capital. An "uncommercial" let is simply one where the rent charged is below the market rate. You can still make a profit but the use of any loss is restricted as I descibed earlier. A profit on an "uncommercial" let is taxable. You can deduct expenses up to the level of the rent that you charge your parents so you have a no profit, no loss situation.

Take a look here for the types of expenses you can claim. Clearly, if your parents met some of those or reimbursed you, there would be a wash for those expenses.

Customer: replied 7 months ago.
Many thanks Tony. I think I get it now - but just to clarify, the £600-or-so my parents might pay still counts as a 'profit', then, i.e. as a taxable income? (But we can offset mortgage interest and other expenses as per your Which link to reduce the taxable amount.) I believe that George Osborne also introduced a new rule coming in next April that means the interest relief is only available at the 20% tax rate - is that right? Also: at the start of the new mortgage (which is a repayment mortgage) I assume as normal we would mostly be paying off the interest rather than the principal - so it's hard to say exactly how much those interest bits would be - but they could be £1000 a month or more at the start I guess.As a back-of-envelope calculation, if my parents paid us £600 a month, and our ground rent was about £70 a month, and maintenance expenses say £50 a month, the remaining £480 would be more than offset by the high interest payments for the first few years, so we would declare it tax neutral anyway as no 'profit' is left...? (But no loss is allowed either.) Have I understood correctly? And if so, does the money from my parents have to be declared on a tax return? I see mixed opinions about that online. (Obviously we would keep clear records anyway.) Thank you
Expert:  TonyTax replied 7 months ago.

I think you have git it now. It is taxable income but you can offset expenses such as mortgage interest, ground rent, service charges and repair and maintenance expenses. The lender's annual mortgage statement will tell you how much of the previous year's repayments was interest.

If it were me, I'd complete a tax return but as you say, there are mixed opinions.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15838
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
TonyTax and other Tax Specialists are ready to help you
Customer: replied 7 months ago.
Huge thanks Tony - really useful advice. 5 stars given! I'll leave you in peace! All the best; Andrew
Expert:  TonyTax replied 7 months ago.

Thanks and good luck.

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