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bigduckontax, Accountant
Category: Tax
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My mother recently sold her home and has bought a new property.

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My mother recently sold her home and has bought a new property. She has had it put into my name and she lives in it with me and my 5 year old son. I believe this is a 'gift with reservation of benefit' for inheritance tax purposes and that if my mother pays me a market rate rent then it won't be counted as part of her estate when she dies. I have a letter from the estate agent stating the market rate rent for a room in a shared house inclusive of all bills but I'm not sure what records I need to keep and for how long. I'd be very grateful if you could tell me whether I have understood correctly so far and whether she only needs to pay me the rent for seven years (all being well) or if she has to pay me for as long as she is living in the house with me? I realise that the rent she pays me will be liable for income tax but am unsure of how I go about arranging that as I am currently on a very low income and under the tax threshold. I would be very grateful for you advice. Thank you very much.
Hello, I'm Keith and happy to help you with your question.
Gifts with reservation (GWR) are a fertile area for disputes with HMRC ever since Inheritance Tax (IT) was introduced. Your mother might, and I only say might, escape a GWR position if she pays a full market rental for living in what was her property. You should ensure that she has a tenancy agreement and a rent book with her rental payments recorded. You will also have to declare the rental on your own annual self assessment tax return and keep full records of rentals received. If, as you say you are below the tax threshold then this may not be an inconvenience, but as soon as you breach the personal allowance level of 10K then you will be taxed on your now enhanced income.
Even with all this in place HMRC may still view the whole process with a very jaundiced eye especially if it only lasts for the 7 year Potentially Exempt Transfer period and may even demand to see bank statements showing the appropriate cash flows. IT kicks in at 325K at a 40% flat rate for anything over this level and if this level is unlikely to be breached there is no problem anyway.
I do hope I have thrown some light on your and your mother's position.
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Thank you for your excellent support.