Living rent free in my mums house letter from HMRC

[DollyPumpkin]

Hi apologies for the long story, me and my husband have lived in our house for 15 years. We private rented for 5 years as my husband wasn’t able to get a mortgage after having a house repossessed when he divorced from his first wife a couple of years before he met me and we wouldn’t get a mortgage on my wage alone. After 5 years of living in our house our landlord served us notice as she wanted to sell the house. My mums husband had just died and left her a large inheritance and so she decided she wanted to buy our house outright and let us live there rent free which we have done for the last 10 years. Our previous landlord sold her the house at less than market value (£115k) as she wanted a quick sale and we had lived there and paid rent and been good tenants for 5 years.

My mum is an elderly lady, she’s in receipt of state pension and attendance allowance and owns her own home outright with savings (over 100k) She’s today received a letter from HMRC saying they are aware she has a second home which she rents out and asking loads of questions about when she bought it, how much it was and where she got the money from and how much rent she gets and she’s in a right panic about it. I haven’t seen the letter myself, I’m going to go round tomorrow and have a look.

Has she done anything wrong here? Is she likely to be fined or penalised?

Just to add, there is ground rent of £100 a year on the house which she pays and £400 a year service charges which we pay. We also meet the cost of any repairs needed and pay the council tax and all the utilities which are in our names. We don’t have a tenancy agreement or any legal agreement as we didn't think it was necessary as no money exchanges hands but she does pay for landlord insurance.

Agree - those saying HMRC will look at OP and her partner's bank statements are incorrect. They aren't being investigated themselves. They just want clarity from OP's DM that she is not receiving rent.

She's clearly not that healthy and independent if she is disabled enough to claim Attendance allowance.

Your DM just needs to write/call (there is a dedicated telephone line; the number is in the letter) and explain the situation. She doesn’t need to supply any supporting documentation, or consult a third party (although she may wish to seek advice re. other matters, e.g. inheritance issues, as others have suggested).
If she is not receiving rent, she is not required to register for Self Assessment or submit tax returns.
The information will have come from the Land Registry or another organisation, not an “enemy”.

So this is a leasehold? HMRC legitimately want to know where the money came from to purchase the house. If it was her savings and you can prove you pay no rent to her then she should employ an accountant to put her case to HMRC. Should have declared the house btw - HMRC always find out.
Also that you pay bills etc is no help to MiL since these could otherwise be set against tax.

Ditto.

I inherited a property 15 yrs ago, it had a tenant, who stayed. When he left a family moved in for a few years, by which time my DD had returned to our hometown after working overseas and she moved in when they left.

I'd used an accountant to do my tax because of the rental on the property and was told I did not need to worry about it as there was no income.

DD is well aware that it might have to be sold should I need care, and that it will form part of my estate shared with her siblings if it isn't sold. Like the OP she plans to buy them out.

It really is nothing to worry about OP

What on earth are you on about.

She's not done anything wrong. She just needs to state the truth, she has a second home that she allows you to tenant rent free.
I personally would see an accountant for professional advice before responding.

I'm sure HMRC will be fine with your arrangement, but nevertheless I would suggest that you draw up a proper rental contract, with a rent of £1 per month. This establishes formally that the relationship is one of landlord to renter, which can be useful if things get complicated in the future. That might include you getting divorced, your Mum getting a new partner, something going badly wrong with the house, etc etc. All of those may be highly unlikely, but for the time it will take and the pound a month it's worth doing for peace of mind. (For example, if you already had this your Mum could just have sent it in to HMRC and unless they decided that they didn't believe her, they would have their boxes ticked.)

It's nothing to worry about. It's called a compliance check. The letters they send are meant to illicit fear and upset but she's done nothing wrong. Don't call them, write to them and say there is no rental income and explain the situation. She will likely get asked to fill in a form stating which property she owns and also send specific bank statements which they will request. They'll then close the case.

If she is claiming attendance allowance assume her health is declining. Have you thought what will happen if she has to go into a home?

As you have been living rent free have you built up sufficient savings to be able to buy the house from her (with a mortgage)?

"Just one example, a dd heard from a doctor friend that 2 other doctors (married) in the same hospital were more or less boasting that they’d never declared their rental income."

Thank fuck I'll never be under their care.

Not exactly, such cross referencing in order to prevent fraud or other such criminal activity is an exemption, and was in the pre-GDPR days too.

I disagree with posters saying the OPs DM shouldn't be doing self assessment.

She owns a second house that HMRC don't know she's not receiving any rent for and she has a lot of savings that will be earning at least £5k pa interest, which added up with potential rental income might not be appropriately taxed.

The simple annual admin job of completing a self assessment will be the easiest way of telling HMRC about this. If the DM can't do it herself, the OP can do it or they can pay an accountant

For goodness sake, she is not receiving any rental income! You don't report potential income via self-assessment, just actual income.
OP, please do not listen to posters spouting nonsense about self-assessment. They really have no idea what they're talking about.
See my previous post, which explains exactly what to do.

The only reason she would have to file a tax return is if her savings interest is over £10K per tax year.

OP ignore the people on here giving strange advice, she has only got to declare it if she has income, as pp said.

it will just be one of their letters where it’s flagged up on land reg she owns more than one property.

I would suggest emailing if there’s an individual email address there, and explaining the situation, if they want more evidence like her bank statements they will ask but most likely that will be the end of it.

Will her estate be big enough to pay inheritance tax? If so the value of the rent you are not paying may be treated as a benefit in kind after death and taxed accordingly eg 7 years of rent at 40% if you're still there 7 years before she dies. Worth checking.

Dealing with HMRC at this stage is straightforward but you’d be wise to go with your mum to see someone about estate planning, otherwise, you’re going to have much bigger financial problems later after she passes.

Whilst her will may make provision for you to inherit the house you’re living in, her executors will have to pay the substantial tax bill that will arise after she dies before the ownership of the house can be transferred to you.

The value of both houses and all her savings will be added together and anything over the threshold of £325k is taxed at 40%. You could lose your home if it needs to be sold to pay the tax bill and your brother’s share of the inheritance.

What is Inheritance Tax? Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions and money. The standard Inheritance Tax rate is 40%. It's only charged on the part of your estate that's above the tax-free threshold which is currently £325,000.

The notional rent is not included.

Would be nice if you included the £175 RNRB, also enquire about a possible dead spouse and their allowance.

I agree on the get advice point, but generally you’re inaccurate. Google sometimes needs a bit of knowledge to interpret correctly.

It’s too late to transfer the house now. It’s ridiculous so many people are suggesting it. It would absolutely have still been taken into account even now; and definitely will be post the April changes, if the Financial Times is correct.

That's simply not true.

Honestly the shite that gets spouted on money threads makes this place ridiculous. How people can sort the wheat from the chaff is beyond me.

Exactly @dinglethedragon utter nonsense. Sounds plausible, but isn’t correct.

Right about what?

She just needs to phone HMRC and tell them the facts: she bought the house with her own money, her daughter and son-in-law live in it rent free.
HMRC just like to check that they aren't missing out on any slices of pie. There's no need for your mum to worry about anything.