Buy to Let for Mum

by Readers Question

9:27 AM, 11th September 2014
About 4 years ago

Buy to Let for Mum

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Buy to Let for Mum

Can I buy some BTL property (I have deposit and good credit rating), let it to my Mum at a below market value (just cover mortgage payments) and allow her to sub let to provide income for her but without IHT issues? Buy to Let for Mum

Thanks

Martin



Comments

Mark Alexander

9:29 AM, 11th September 2014
About 4 years ago

Hi Martin

Yes you can, PROVIDING you DO NOT need a mortgage.

If you need a mortgage this would be a regulated Buy to Let mortgage and these are more scarce, hence more difficult to obtain and can cost more. They are far more reliant on your income than a normal buy to let mortgage.

If you take a normal BTL mortgage you may well be in default by letting it to your mother.
.

matchmade

11:16 AM, 11th September 2014
About 4 years ago

Hi Mark - I'm curious: why would a BTL mortgage provider ban Martin from letting to his mother? As long as Martin has a proper AST with his mother and the mortgage interest is being paid, what's the problem? His mother is a citizen like any other, it's up to him to do due diligence and set the level of rent, and it's up to him whether he agrees to let her sub-let under the terms of the AST.

Quite why Martin wants to do this, he doesn't make clear. Why doesn't he just invest in BTL property on his own account, pay his mortgage interest, maintenance costs and taxes in the normal way, and give his mother as much money as she needs and he can afford?

Martin Eyre

11:25 AM, 11th September 2014
About 4 years ago

Hi Mark & Tony

Thanks for your comments... Some more information...

I don't want the hassle of managing the properties, don't want to make a significant loss, don't need to make a taxable profit and think I have a better chance of getting good mortgages deals than my elderly mother. She enjoys managing buy to lets and this will give her a part time job and an income whilst it will benefit from capital growth (assumed) in the long run.

She will pay less tax than me on any profits and I am (hopefully) further away from the uneatable inheritance tax.

Is there an issue as it might be considered 'not at arms length' or whatever the phrase is?

Many thanks

matchmade

11:59 AM, 11th September 2014
About 4 years ago

Reply to the comment left by "Martin Eyre" at "11/09/2014 - 11:25":

This all seems unnecessarily complicated. You don't need to rent any property to your mother, which she then sublets. Just buy the house(s) in your name, rent them to the tenants at a proper rent figure and with an AST in your name, and pay the mortgage company their interest: all perfectly normal

Then, delegate day-to-day management of the properties to your mother and pay her a salary. The salary cost is deductible from your profits, just like any normal business cost, so you pay less income tax. I don't know how much income your mother needs, or if she has any other paid income, but assuming not, you can keep your joint costs to a minimum if you pay her just under the National Insurance threshold for employers, which is also under the NI threshold for employees. Then neither you nor she have to pay any NI, you pay less income tax because you have lower profits, and she will pay income tax in the normal way.

The situation is no different from a BTL landlord employing her husband as a secretary for day-to-day running of the business. It's a long-established method of passing income from a higher-rate taxpayer to a lower-paid one.

Mark Alexander

12:03 PM, 12th September 2014
About 4 years ago

Reply to the comment left by "Tony Atkins" at "11/09/2014 - 11:16":

Hi Tony

Sorry about the delayed response.

BTL mortgages are generally unregulated but there are a few exceptions. These are where the purchaser intends to move into the property or let to a family member. In such instances the BTL mortgage is treated as a home-owner mortgage for regulation purposes. This puts a greater administrative burden on the lenders so quite a few simply refuse to offer regulated loans.

When the regulations were introduced they were abused. Buyers would say, "I do not INTEND to move in or let to a family member" and would then change their mind the day after completion. This made repossessions difficult for lenders so they began to add conditions to make it a breach of contract if a borrower lived in a property with a BTL mortgage or rented it to an immediate relative.
.

Mark Alexander

12:07 PM, 12th September 2014
About 4 years ago

Reply to the comment left by "Tony Atkins" at "11/09/2014 - 11:59":

Great response Tony, I concur.

If Martin's mother was planning to pay part or all of the deposit, there's nothing stopping her from doing that using your method either.
.

Martin Eyre

14:53 PM, 12th September 2014
About 4 years ago

Thank you for the helpful comments.

Options I'm currently considering...

1) Employ mum to manage the properties (Tax situation OK, but not great due to NI)
2) Let to mum and her sublet (better for me, guaranteed income, better for her as no NI)
3) Mum to set up property management business (Tax and business benefits great, but need to run the business).

If we did option 3, what is the most, as a percentage, that I could pay her and justify to HMRC? I've seen some agents advertise 15% + VAT = 18%.

Many thanks

Mark Alexander

15:07 PM, 12th September 2014
About 4 years ago

Reply to the comment left by "Martin Eyre" at "12/09/2014 - 14:53":

I might be wrong but I think you can pay your Mum whatever you wish without HMRC raising an investigation. To secure the income she could sub-contract everything including rental income insurance and retain the profit - see >>> http://www.property118.com/property-management-checklist/67891/
.

matchmade

16:34 PM, 12th September 2014
About 4 years ago

Martin - you don't say how much income you are trying to pay your mum here. Are we talking about multiple properties and tens of thousands of pounds (hence your mention of VAT), or less than £10,000? if the latter, I recommend keeping everything as simple as possible and paying a bit of NI if you have to. Sub-letting just seems like a really bad idea and could come across to HMRC or the mortgage provider as rather suspicious. Don't let the tax tail wag the dog.

1) and 3) seem pretty similar to me, unless you mean to set up a limited company. Your mother can claim business costs against her income: she's just self-employed.

Martin Eyre

16:47 PM, 12th September 2014
About 4 years ago

Tony, thanks again for your comments.

I guess it could be a maximum of 10 properties eventually, with the aim of paying my mum up to £2000 per month.

The VAT was on the 15% management fee from a London based agent. I guess I would be safe (from HMRC) if I could show I was paying my mums limited company a market rate for management services, but it might need to be 25% initially.

The best tax situation is from running a limited company, and its something she would be comfortable with. But the other options might be better in the eyes of the tax man if I need to pay her more?????

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