Renting from family?

Question

Hi.

A friend of mine's grandad bought a house for her and her little girl to live in. She doesn't claim housing benefit as she works. As it was just off her grandad, he didn't bother declaring anything. He doesn't get an income from it. She pays him a 'rent' but that just pays for the council tax and water rates, then the rest goes into a pot to cover any expenses to do with the house - maintainance etc. Also, as he paid cash for the house out of his savings, he uses any left as his cash as sort of replaying him for the money he paid for the house.

Someone has said this is illegal and her grandad could get into trouble. Seems daft but now she's worried.

Can anyone help?

Answer 1

Another aspect of this you should consider is tax.

Two issues.

If the property is owned by your friend then it seems her grandfather has made a gift to her of (probably) the cost of the house. That gift stays in his estate - for inheritance tax purposes - for 7 years after the gift is made. If he dies inside that period then the value of the gift will be added to the rest of his estate and charged to inheritance tax accordingly.

If any tax is due in respect of the gift at that time then your friend will have to pay the tax as she was the recipient of the gift.

If he survives the 7 year period then the gift is not counted in his estate when he dies.

On the other hand if the property is owned by her grandfather then there is a chance the  "pre owned assets" rules might come into effect. If these rules apply then your friend must pay the proper market rent to her grandfather or, if she doesn't, then he will deemed to be receiving that market rent anyway. Either way he will need to declare the rent on his own Tax Return and pay tax on it according to his own circumstances.

However, if he elects for the property to remain in his estate for inheritance tax purposes then the "pre owned assets" rules don't apply.

All in all it may be wise for some professional advice to be taken in these areas. For peace of mind.

Answer 2

I don’t think there’s anything really illegal here, but perhaps a bit irregular.  I can’t see anything he should have reported when the arrangement was set up.  If the house is ever sold, because it’s in the grandfather’s name he will have to consider capital gains tax on the profit, but that’s for the future.

I do think your friend ought to own up to the council as the occupier and pay the council tax (and water rates) directly.  It would also make sense if she kept the extra for repairs etc in a savings account in her own name and does the repairs herself.  As it is the grandfather IS deriving an income from the house, he should arguably be telling the tax office about it; and filling in annual tax returns showing that there is no profit.  In fact, I’m not entirely sure that he is not making a “profit” in tax terms, because although he is receiving an amount equal to the council tax, he is not liable in law to pay tax to the council (your friend is, as occupier), so could be denied a deduction (for income tax purposes) from what he receives, leaving him with a net taxable profit equal to the council tax she pays him!

Answer 3

the only problem would be if she was claiming housing benefit as ur not allowed to rent off arelative. as thats not the case then there is no problem.

Answer 4

You asked this in property and leasing as well

Not illegal, why would it be?

You should declare rental income to HMRC for tax purposes as if there are any profits involved they are taxable and the house may be subject to Capital Gains Tax if it is resold

The only time it is an issue is where the tenant applies for Housing Benefit to pay rent to a relative who is the landlord - again this isn't illegal but council's tend not to like this and say the 'tenancy is contrived and non commercial', but it can be overturned at appeal.

I have attended many appeals about this and Housing Benefit is always issues in these cases  the legality of renting from a relative is never in question, it is perfectly okay to do so

The only issue with your situation is the Tax. Any profits from the rent must be taxed, so the income should be declared to HMRC

lastly, the tenant is responsible for the council tax, not the landlord. They should pay the council direct. The landlord is perfectly free to reduce the rent by this sum in that situation if he wishes