Tax issues with charging below market rent to help a relative?

Tax issues with charging below market rent to help a relative?

10:56 AM, 10th September 2013, About 8 years ago 35

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Can anyone think of any potential tax or legal implications with letting out a property at below market rent to help a close relative? Tax issues with charging below market rent to help a 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?



Comments

by Puzzler

9:41 AM, 16th September 2013, About 8 years ago

I did look Mark and having just lost the second parent I know that the new rule makes a trust for half a couple's nil rate band now unnecessary. The information in the link you posted is out of date. The first nil rate band if not used (or remaining proportion) is automatically transferred to the surviving spouse on first death so that double can be allocated on second death. This has the same effect as the trust you refer to but is now standard tax law and does not require it to be written in to a trust as before. IF it is a proportion then the proportion of the nil rate band remaining is applied to the nil rate band at the time of the second death. So (this is hypothetical) my father died in 2006 when the nil rate band was £285K, say his estate was £142.5K he would have used 50%. When my mother died this year the band was £325 so she could have automatically added in 50% of £325 (not £285) to her £325 making her nil rate band £467.5K. No trust required. If he left his estate to her there would have been no inheritance tax to pay on his death thus twice the current threshold would have been available on her death. Same result as the trust had before.

Unless it was something else you were referring to?

by Puzzler

9:51 AM, 16th September 2013, About 8 years ago

Reply to the comment left by "Mark Alexander" at "14/09/2013 - 18:25":

PS I was talking about inheritance tax - having rechecked your link you are right yours is about avoidance of care fees. However from my experience even a trust will not help if it can be proved that it was done to avoid paying, which in this case it seems it is. It relied on the IHT law to enable it and I wonder if it is still valid? but I do not know. I actually believe people should pay their way if they can. Apart from anything else if the state pays the care offered is very limited (from experience with both parents).

by Mark Alexander

9:53 AM, 16th September 2013, About 8 years ago

Reply to the comment left by "Puzzler " at "16/09/2013 - 09:41":

I was referring to estate planning which avoids the sale of assets to fund long term care fees, this is the link >>> http://www.heritagewills.co.uk/property-protection-trust.htm

I'm really not sure what you were reading as I was not referring to IHT and the page I've linked to does not refer to any of the figures you are quoting, or indeed IHT.

I agree with the point you are making about IHT but I do not see the relevance to the point of the question I was answering or indeed to the page I linked to.

by Mark Alexander

9:55 AM, 16th September 2013, About 8 years ago

Reply to the comment left by "Puzzler " at "16/09/2013 - 09:51":

Clearly we were posting at the same time LOL.

by Puzzler

10:01 AM, 16th September 2013, About 8 years ago

Sorry I just saw the article was about putting half in trust and assumed it was IHT as the estate planning you mention is not ironclad especially if the state can argue that it was done just for that purpose. Now that IHT effect is gone it would be difficult to claim it wasn't (and may be why the tax rule changed?) Even outright gifts can be reclaimed.

Teach me to read properly rather than scan 🙂


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