Rental property and income

LynWest

Hi there my client has just told me after sending them their tax return for approval that she has a property she rents out with her parents! She says that she gets no income from the rental, her parents rent it out and pay the mortgage on it. The snag is the mortgage is in her name only!! The rental agreement is in the parents only!! She is going to check to see how the parents have declared this income, if at all!! My take is that if the parents have declared the whole income deducting mortgage interest only and not the full mortgage value then the tax has been paid on the rental income and the payment of £350 to my client each month is a regular payment of income, not detremental to the standard of the living and therefore not taxable. And my client is would only have a tax issue when it came to selling the programme with Capital Gains. Am i correct in this i'm really not sure i am! Why are things never simple nearing the deadline!!!

T.C.

Who's name is the title in, ie who owns the property?

PGM

LynWest wrote: »

My take is that if the parents have declared the whole income deducting mortgage interest only and not the full mortgage value then the tax has been paid on the rental income and the payment of £350 to my client each month is a regular payment of income, not detremental to the standard of the living and therefore not taxable.

I don't quite get this bit. Does this cover the whole mortgage? If so, then technically the capital repayment part is profit (to the daughter)

Its fine for her parents to rent the property and for them to deal with the profit, the difficult bit is likely to be if the HMRC says show me where you pay the interest and all they can show is the £350 payment to their daughter.

Ideally they'd be able to show payments for allowable items such as the interest & insurance.

And other dealings with them and their daughter being kept totally separate.

T.C.

If she owns the house, then the tax man will want to know about it!

LynWest

Thanks, the daughter has confirmed that she is the sole name on the mortgage and therefore the owner. So the £350 payment she receives from her parents she has to declare to the tax man deducting normal things like wear and tear and mortgage interest, insurance etc. am i right?! Or should i be declaring the £800 rent to the taxman!?? sorry at the end of a very long week i have brain fog!! ***need some beers a pizza and a nice sunny beach in the south of France***

LynWest

Sorry PGM, i thought that on a recent tax course i went on that you could pay regular payments out of your income to a relative and as long as you had paid the initial tax and they were regular and not detremental to your standard of living they received them tax free. So my Friday afternoon logic thought that if the parents had paid the tax then the payment to the daughter could be treated as a regular payment out of parents income and not as taxable income.

T.C.

Yes but who has their name on the deeds of the property? The mortgage itself does not decide ownership of the property. In a recent enquiry, I had a property which husband was paying tax on and it was found to be owned jointly and they insisted that wife was to pay half tax.

LynWest

Ok, didn't think you could get a mortgage on a property you didn't own. Shows the danger of assuming, i shall go and check. Thanks TC

T.C.

She would be named on the deeds, but it could be owned jointly. If she owns it outright, then it is her house and she is responsible for tax on the profit.

LynWest

Right, i have just got off the phone from the client. The deeds are in the mum dad and daughters names. The mum receives all of the rent at £850 and pays ntax on the whole £850. she then pays £354 a separate account in the daughters name which pays all of the mortgage and not a penny more!!! Should each party be declaring 1 third of the profit, or can she leave her tax return as tax has been paid? very confused now ***head going boom boom boom***

T.C.

Each party needs to declare a third, yes. It needs to be drawn up as a P & L account and then the profit shared in thirds. This needs to be declared on each tax return on the 'land and property income pages', again a third on each (a third of the income, a third of the expenses and a third of the profit). Hope that helps.

LynWest

Thanks very much TC. I shall go back to her, would the mum (not my client) be able to claim back the tax she has paid or is this opening a whole can of worms?! Have a fab weekend

T.C.

If she was to try and claim some back, then the other parties would have to put in 'old' tax returns. I will leave alone and just start it correctly now!

deanshepherd

There are options in this scenario.

The daughter could be letting her 1/3rd share to her parents for £350 per month against which she can offset her mortgage interest. If this results in a profit then she may be taxed depending on her other income.

Her parents then let out the entire property and an allowable cost for them will be the rent paid to the daughter (irrespective of the mortgage interest) as they are effectively then sub-letting her share to the tenant.

By adjusting the monthly amount paid to the daughter you can adjust where the profit is going to be assessed depending on either who wants that liability or (more likely) who has the lowest marginal tax rate.

Of course you need to get everything documented and you certainly can't backdate anything but it may help optimise the tax position moving forward.

LynWest

Thanks for that Dean and TC it has helped alot and cleared all the scenarios i had running around my head!! Head is much clearer today. I know that i am fairly new and maybe a little on the naive side when it comes to my clients, but i wasn't expecting a bombshell, like this. I thought i knew ( sound of mothers voice now in my head saying " we all know what thought did!!") my client inside out, so complete everything and send it off for her authorisation, when i got the dreaded call on friday afternoon saying "Does it matter that i have this property that i am renting out!" You live and learn!! Many thanks for your help this forumn really does keep me sane! Have great weekends x