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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15976
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I'm following up on our previous conversation at the end of

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Hello Tony. I'm following up on our previous conversation at the end of July.(A reminder of the situation) We are buying a second home outright by remortgaging our current home. My elderly parents will live in the 2nd home. They want to pay a contribution to our costs. I understand that if they pay us rent directly, it will be taxable (minus allowable landlord's expenses).I have now been advised that instead they could pay money regularly directly to our lender (so we would not receive any direct income from them). Is this the case (assuming the lender accepts it)? (My parents would not expect any extra charge on the property, ie have no expectation of owning a share of it.)Thanks!

Hi. My name is*****'m looking at your question now and will post my answer or ask for more information here in a short while.

Can I ask who advised you that you could avoid tax on rental income by having your parents pay the lender.

Are your parents contributing to the purchase price of the new house?

Customer: replied 1 year ago.
Hello Tony. It was a professional property tax advisor. He was very helpful - but on this particular note, I thought I'd like a second opinion. I'm not actively aiming for tax evasion! But if there's a legitimate route of this kind, it would of course be interesting. My parents are not contributing at all to the purchase of the house, no.

Forgetting the idea of paying the lender directly for now, would they be paying you a sum equal to a market rent? Would the mortgage interest you pay exceed the "rent" they pay you?

Customer: replied 1 year ago.
The mortgage interest we would pay would be about £1200 (on top of our current mortgage). My parents could afford to pay us £650 to £700 a month at most. The market rent for the property we have in mind is a little hard to establish but it is probably in the £700 to £800 range. So at best they would be paying at the lower end; more likely, an 'uncommercial' 'rent'.
Customer: replied 1 year ago.
Sorry, I meant monthly mortgage payments rather than 'mortgage interest' per se. (It's a repayment mortage)

How much will the monthly interest be on the part of the mortgage used to buy the new house? Roughly.

Customer: replied 1 year ago.
Of the £1200 a month, I *think* the interest part will initially be about £410 a month (back of envelope). I'm aware this is currently an allowable expense - but also that George Osborne introduced new legislation so the full mortgage interest tax relief is being phased out over the next three years.

So long as you can find enough expenses to cover the rent, there would be no tax to pay. However, as you say, the treatment of mortgage interest on let property will change over the three years from 6 April 2017.

I have to say that I've not come across a situation where the parents pay the interest so that the landlord doesn't have to pay income tax. I would have thought that HMRC would have a problem with this type of arrangement for obvious reasons and I would need to see a clearance letter from HMRC to convince me that it would work.

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

Customer: replied 1 year ago.
Thanks Tony. I don't think long-term we'd find that many expenses, and therefore the tax burden would creep up, but if we have to pay it, so it goes. I understand the need to pay tax on income, of course! I guess this situation is unusual in that we are not making any clear profit on all this, and are purely doing it to help my frail and elderly parents move near to us, as they cannot afford property in our area. Though of course long-term we will have an asset which *hopefully* will be worth more than we've paid for it (and therefore subject to CGT...).I think the other advisor's take was that there is no reason why HMRC would have any knowledge of payments direct to the lender (which would come out of my parents' income, so not reducing their capital for IHT purposes - not that their estate would be worth above the IHT threshold anyway). But I certainly wouldn't want to do anything that would invite HMRC to hit us with penalties if all this somehow came to light.

That''s my point. HMRC wouldn't necessarily be told and that worries me. If it were me, I wouldn't do it.

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Customer: replied 1 year ago.
Thanks Tony - I think that's what was worrying me too... I'll leave you in peace. 5-star advice again!