Tax issues with charging below market rent to help a relative?
Can anyone think of any potential tax or legal implications with letting out a property at below market rent to help a close relative?
I would of course put it all on a formal basis having no desire for a family relationship to sour due to financial reasons!
A close relative has recently returned after 7 years abroad. They have no credit rating, having left the UK as a young adult and lived in a country with a “closed” currency. In order to help until they have built up a credit rating, I am in a position to purchase a property on a BTL mortgage, and let it to them at a rent equal only to the mortgage payments. They would then be able to save for a deposit with the saving. I have no wish to make a profit from this relative, only to help until they have the 3 years credit rating the bank is asking for. There would be a time limit on the arrangement, which they know, being keen themselves to climb the property ladder.
Are there any legal or tax pitfalls awaiting us?
35 comments on this article
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Member Since July 2013 - Comments: 1268 - Articles: 1
4:14 PM, 11th September 2013, About 13 years ago
Reply to the comment left by “Neil Barlow FCCA ATT” at “10/09/2013 – 15:39“:
Exactly – you cannot charge below market rent to generate a tax loss
4:30 PM, 11th September 2013, About 13 years ago
Just bear in mind that if the tenant is claiming housing benefit this will not be granted if there is a close realtionship, I am sure this is the case, check it out.
Member Since September 2013 - Comments: 154 - Articles: 1
6:46 PM, 11th September 2013, About 13 years ago
Comments: 87 - Articles: 5
6:56 PM, 11th September 2013, About 13 years ago
Reply to the comment left by “Jay Jay” at “10/09/2013 – 13:48“:
Jay Jay/Mark – I think you are probably getting confused with the ‘benefit in kind’ calculation if you let to an employee. Then an employees income tax bill will be based on the different between the market rent that he would’ve paid if he had paid for it himself, minus whatever contribution he makes. Could it have been this discussion you had with tax office?
Member Since January 2011 - Comments: 12255 - Articles: 1477
7:30 PM, 11th September 2013, About 13 years ago
No confusion here Kirsty, that’s what I was eluding to in my first comment
Member Since January 2011 - Comments: 12255 - Articles: 1477
8:15 PM, 11th September 2013, About 13 years ago
Reply to the comment left by “Carol Thomas” at “11/09/2013 – 18:46“:
Hi Carol
I agree that a “good accountant can work wonders” and with respect I suggest you start looking for one if what you are saying is true.
You can offset 100% of your expenses against the mortgage up to the value of the rent your father is paying. No wonder the HMRC are happy with your current arrangement, you could legitimately be claiming 4 times as much!
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Member Since September 2013 - Comments: 154 - Articles: 1
8:37 PM, 11th September 2013, About 13 years ago
Member Since January 2011 - Comments: 12255 - Articles: 1477
9:45 PM, 11th September 2013, About 13 years ago
Reply to the comment left by “Carol Thomas” at “11/09/2013 – 20:37“:
Thank YOU Carol, every little helps. I hope in your case that it is you who is mistaken and not your accountant. If that’s not the case please let me know and I will introduce you to Neil Barlow who commented earlier on this thread. He is the accountant and tax adviser to my family. Check out his member profile. 🙂
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Member Since September 2013 - Comments: 154 - Articles: 1
10:39 PM, 11th September 2013, About 13 years ago
Member Since January 2011 - Comments: 12255 - Articles: 1477
9:10 AM, 12th September 2013, About 13 years ago
Reply to the comment left by “ ” at “11/09/2013 – 16:30“:
If you live in a property owned by a family member and pay them rent, you may be entitled to housing benefit. The council will want to take a detailed look at your agreement with your landlord. You won’t get housing benefit if:
you’re not paying rent on a commercial basis
the arrangement has been set up to take advantage of the housing benefit system – this is called a ‘contrived tenancy’. For example, if your landlord only asks you to pay rent when you are not working (and so are eligible for housing benefit), but not when you are working (and earning too much to qualify for housing benefit), this would be a contrived tenancy.
Reference >>> http://england.shelter.org.uk/get_advice/housing_benefit_and_local_housing_allowance/housing_benefit_if_renting_from_a_family_member#housing_benefit_if_living_in_a_property_owned_by_a_family_member_
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