Rental Income – Father & Son

by Readers Question

11:54 AM, 25th May 2015
About 4 years ago

Rental Income – Father & Son

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Rental Income – Father & Son

I have a few queries I was hoping someone maybe able to help with. Rental Income - Father & Son

I am 27 years old and currently looking to purchase a two/three bedroom house in London potentially with the mindset of renting out one or two of the other rooms, whilst also still living in the property myself. To do this, my dad was actually going to help me by either buying with me or gifting me some of the money to make this possible, i.e. circa £100k whilst I would put in a smaller deposit and then take a mortgage out of the rest. It seems due to his age (61) and lack of income (other than final salary pension) that we would struggle to get a joint mortgage, or at least a mortgage of 25 + years.

Therefore it seems that him gifting the money would be the most realistic solution (although I understand there maybe IHT issues if he dies within 7 years due to the gift being a PET. What I would like to know is if it is only me who takes out the mortgage – Can my father then receive any rental income on any rental profits that come in as a result of renting out two of the rooms or would it be me that would need to receive them due to taking out the mortgage (and therefore being listed on the deeds).

The alternate would be me to receive the rental income and then make payments to him – however I have concerns over HMRC might view this – i.e. Was this actually a loan arrangement and these are repayments, or alternatively am I allowed to gift back money, or would this be seen as gift with reservation – i.e. my father gave me the capital to purchase the property and then I am giving him back rental income which he benefits from.

Can anyone advise – or if they have any other bright ideas on my whole situation.

Thanks

Alex Ward



Comments

Mark Alexander

11:22 AM, 26th May 2015
About 4 years ago

Hi Alex

I think your father's age is a 'red-herring' here because, to my knowledge, there are plenty of lenders that will consider him as a second applicant on a 25 year mortgage. Obviously his credit status will be taken into consideration but if you qualify for the mortgage in your own right I cannot see why adding your father will adversely affect your mortgage application. I recommend you to speak to Howard Reuben at HD Consultants about this - see >>> http://www.property118.com/member/?id=314

With regards to who owns what share of the property, regardless of whether or not you father is a party to the mortgage, this can be dealt with effectively by a Declaration of Trust at the point of purchase - see >>> http://buytoletconveyancing.co.uk/declaration-of-trust/

The "PET" (potential exempt transfer) issue needs some detailed consideration. You haven't said what percentage of the money paid by your father is to be treated as a gift and what percentage is to be treated as investment.

A Declaration of Trust can stipulate what percentage of the rental income your father should receive, as well as his share of the equity and capital growth in the property, which may be two different amounts.

Given that you will be a 'live-in-landlord' you will also have the benefit of tax advantages associated with the Rent-A-Room scheme. This entitles you to receive the first £4,250 per annum of rental income tax free, regardless of any other taxable earnings. There is nothing to prevent you paying such an amount (or a different amount) to your father as an allowance to help him meet his own financial commitments. However, you should take professional advice on this matter so as to ensure that such money is not treated as taxable income, a gift or, as you have mentioned in your post, a reservation of benefit associated to a gift. I set up something very similar to enable my parents to retire early and bridge the associated hole in their finances from their mid 50's to their 60's when their pension incomes became effective. The accountant who advised me on this is a member here - see >>> http://www.property118.com/member/?id=452

Another advantage of being a resident landlord is that people you share your home with will not be tenants. They will be lodgers and on that basis do not enjoy the same level of protection in terms of tenancy deposit legislation of protection from eviction. You do not have to protect their deposits and can ask them to leave at any time subject to giving them "reasonable notice" (typically one month but occasionally much less depending upon circumstances). You do not need a Court Order to exclude lodgers from your property, e.g. by changing the locks.

I hope this helps.
.

Alexander Ward

22:36 PM, 26th May 2015
About 4 years ago

Reply to the comment left by "Mark Alexander" at "26/05/2015 - 11:22":

Hi Mark,

I was under the impression that most lenders would not look at someone who is 61 years old due to their age. I will look into this a little further. Are there certain lenders that are lean towards older individuals?

With regards to your second point re a trust deed to ensure that an individual can be named as a beneficiary - are there any other ways of doing this or does this have to be a written agreement.

My thought process was that again, if the house is part beneficially owned by my father then I would have thought this would be deemed reservation of gift.

Finally, to your point of the PET - it would be preferable that the whole £100k or however much my father lends me is deemed an investment rather than a gift, but again, would HMRC not deem my father giving me said amount a gift rather investment, or could this be agreed somehow, which would therefore mean making my father a beneficial owner somehow more above board should HMRC ever choose to investigate.

Thanks for your other useful comments. I may well consider getting in touch with Howard over the coming days.

Alex

Mark Alexander

8:34 AM, 27th May 2015
About 4 years ago

Reply to the comment left by "Alexander Ward" at "26/05/2015 - 22:36":

Hi Alexander

The mortgage advisor I recommended to you will be able to comment further on mortgage availability.

I did not recommend a Trust Deed, I recommended a Declaration of Trust, they are different things. Yes the arrangement needs to be in writing and properly executed.

If the house is beneficially owned by your father then it has not been gifted. You cannot have your cake and eat it. However, there are ways to structure a deal to provide the end goal you are seeking.

You appear to be confused about whether your father if loaning, gifting or investing all or part of the money and how much he wants back. Until you are clear about that you will continue to be unable to resolve the problems you are creating for yourself.
.

Alexander Ward

8:48 AM, 27th May 2015
About 4 years ago

HI Mark. The ideal was that it would be an investment as it would be so my father could get a rental yield but I was told this would not be possible by the independent mortgage association. Sounds like this may well be incorrect.

Mark Alexander

8:51 AM, 27th May 2015
About 4 years ago

Reply to the comment left by "Alexander Ward" at "27/05/2015 - 08:48":

I am not familiar with any official body called the "independent mortgage association", are you actually in the UK?
.

Alexander Ward

9:14 AM, 27th May 2015
About 4 years ago

Apologies. It was Which. And yes I am based in London.

Mark Alexander

10:52 AM, 27th May 2015
About 4 years ago

Reply to the comment left by "Alexander Ward" at "27/05/2015 - 09:14":

Hi Alex

Please let me be clear about this.

Let's ignore the label put on your Dad's £100,000 for now and let's focus on these key issues:-

1) does he ever want the £100,000 to be repaid?

2) how much income does he want from whatever this arrangement ends up being labelled as?

When I know the answers to these questions I may be in a better position to suggest a structure which effectively achieves your mutual objectives.
.

Alexander Ward

13:55 PM, 27th May 2015
About 4 years ago

Reply to the comment left by "Mark Alexander" at "27/05/2015 - 10:52":

Thanks Mark.

The short answer to your question is yes - the money would at some point likely need to be accessed, but not within the next 10 - 15 years. He is looking at a 10 + year time horizon for this investment. However, as per any investment, he would hope to receive an annual income from this investment of circa 5-6%.

So I guess the answer to 1. is yes - either him or my mother will likely eventually need access to the money, but not for the short term.

And 2. Around 5-6% per annum.

Does this help?

Apologies if I have not explained this very well, let me know if you would like any further clarify and I'll happily provide it.

Mark Alexander

14:14 PM, 27th May 2015
About 4 years ago

Reply to the comment left by "Alexander Ward" at "27/05/2015 - 13:55":

Hi Alex

On that basis the correct badge is that is is a loan on which you will pay interest.

You can offset the interest payments against your rental profit but your parents will need to pay tax on the income they receive, just as they would on interest earned in a bank or building society.

I strongly recommend you and your parents to get a loan agreement drawn up.

Your questions regarding gifting and potentially exempt transfers are not applicable based on the way that you have outlined the transaction to me.
.

Alexander Ward

14:29 PM, 27th May 2015
About 4 years ago

Reply to the comment left by "Mark Alexander" at "27/05/2015 - 14:14":

Thanks Mark

Just so I can recognize the difference, what would constitute an investment in this case?

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