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.

On your first point, there is no CGT payable by a deceased person. This is part of the reason that Inheritance Tax exists. If someone sells an asset for a profit in their lifetime they pay CGT on it. If they have made a massive profit on something but haven't sold it before they die, IHT is paid on the value instead (less the nil rate band, etc).

As others have said OP, HMRC obtain records from the Land Registry so they will see that she has two properties. If they wanted to, they could probably see that the previous owner of the property used to rent it out from that person's tax returns, and they've put two and two together.

We've had clients that have had similar letters (usually because they genuinely do rent a property out and have "forgotten" to put in on a tax return).

I would suggest calling them - it's your Mum they want to speak to, but if you call together she can give them verbal authority to speak with you on it. You can then explain the situation over the phone and ask them what sort of information they would need to update their records.

She hasn't evaded any taxes, so please don't worry.

I would echo the posters saying to get some estate planning done. It's a horrible conversation to have with parents, but it needs to be done.

I'm not an expert, and there are clearly some very knowledgeable posters on here, but if she transfers the property to you now and lives for another 7 years then it will not be taken into account for IHT (if that is likely to apply to your DM's estate). Is she a widow or divorced? That makes a difference as to whether the exempt amount is potentially up to £1m or £500k.

She’s a widow

It is really nothing about to be worried. When I helped my son do his first tax return it was amazing that HMRC had via the Land Registry knowledge of the house in his name - it came up as one of 4 addresses (the other 3 made up) to which he might be linked when suggesting a key word or password reminder. It just shows how linked up the state is.

In your case your mother receives no rent so she just needs to write back to HMRC by special delivery signed for post I would advise (her not you - HMRC want to hear from you not from her and they will want it in writing so no point in being on their help line on the phone for 3 hours getting upset).

She just needs to set out in clear facts with attachments if she wants what happened when but the essence being you live there rent free. She is perfectly entitled to do this. My adult sons live with me rent free (and each let out a house they own on which they pay vast amounts of tax on rent). Letting a family member live in a property whether you live in it or not is perfectly normal as is HMRC checking up. It will all be fine. Expect they will take about 4 months to reply to the letter however but that is just how it is as HMRC are very busy.

Your mum will have inherited unused IHT allowance and RNRB from her deceased spouse.

As her DM is receiving AA, the more problematic issue is deprecation of assets, not IHT in this scenario.

It wouldn't be counted for inheritance tax but can still be taken into consideration by the local authority if op's mum had to pay care fees. It is never advisable , especially when she clearly already has health issues bad enough to warrant Attendance Allowance, to give away property or large amounts of money as could potentially be considered deprivation of capital if care fees need to be paid.

More rubbish spouted about the mum needing to complete a tax return. This is the official info!

Property you personally own
The first £1,000 of your income from property rental is tax-free. This is your ‘property allowance’.
Contact HM Revenue and Customs (HMRC) if your income from property rental is more than £1,000 a year, up to £2,500.
You must report it on a Self Assessment tax return if it’s more than:

• £2,500 after allowable expenses
• £10,000 before allowable expenses

Thanks everyone. I’ve seen the letter now and no wonder she was so worried it’s 24 pages long! There is a questionnaire for her to fill in asking all sorts of questions. Does she need to fill this in and send it back with a letter explaining the situation or just a letter?

The letter should tell you if she needs to fill it in or can just write to them explaining the situation.

If it doesn't, I would ring them, from her house so that she can authorise them to speak to you.

@DollyPumpkin have you thought about what will happen if she has to go into care home?

That is incorrect. Pension credit is means tested whilst Attendance allowance isn’t. The lady’s mum has considerable savings so isn’t eligible for pension credit.

Clearly better to fill in the questionnaire answering their questions. Covering letter included, if there is any more you need to say.

We rent a property at very greatly reduced rate to my parents and our accountant advised us that Hmrc won’t let you let someone even family live rent free or below market rent without us paying tax at going rate for market rent, which we have to do. I would approach an accountant or CA for help prior to providing any information to Hmrc x

Would it protect the house from the care fees issue if the OP were to buy say a 50% share in the property from her mum? That way it isnt deprivation of assets as the OP would have legally bought it.

Just a thought....

I suggest you get a new 'accountant' then. One who is actually familiar with the legislation.
If you don't charge rent you have no rental income. It isn't a difficult concept to grasp.
If you charge rent but it is below market rate, then you pay income tax on the actual profit, not some made up profit that pretends you have received market rate rent! If you do charge below market rate you can never make a loss as the expenses you are allowed to offset are not allowed to exceed the rent received.

Just a thought, but DON'T 'phone them .

The deadline for S.A. submissions is 31/01, & the 'phone lines are worse than usual at the moment.

It will be a different number from the SA helpline and usually answered quickly.

This. Its to do with capital gains tax

just call and explain
i have had colleagues this has happened to / they may ask to see bank statements etc

everything will be fine

She (with your help perhaps) needs to tell HMRC she doesn't get any rent. And that should be the end of it. Surprisingly most people I've talked to a HMRC are quite human (unlike other government departments) so you might say something in fun like "the only rent is to invite her for dinner once a year and buy her some birthday flowers". They need to know that it's something lovely that she's doing for family.

She likely will need to prove that she doesn't need rent - that this is a gift to you in excess to her income basically. That means there's no income tax to be paid and when she dies there won't be an issue with inheritance tax.

No it wouldn't protect the house from care costs as the person looking into mom's finances would ask about this. They could still insist that the house be sold to cover the costs. OP would get 50% of the value back but not be able to remain living there. If they weren't made to sell immediately they couldn't inherit mom's half when she dies as that would belong to the council.

You may need to show HMRC your bank statements - both yours and your mum's - to prove you haven't been paying rent. If you can account for all your monthly income eg spends as well as regular savings, then that would help

As Op's mother is getting attendance allowance it would be fairly easy to argue that needing more care is almost certain, So giving house to OP regardless of how long she lives could be regarded as deprivation of assets, However if OP can buy the house now from her mother at market value with a mortgage then it would not be deprivation of assets as OP's Mum would now have more savings.Selling fractionally below market value would probably be alright like 185K instead of 199K but selling a 350K house for 200K could cause a problem
so I think HMRC are fairly easily dealt with but the future needs a bit more planning, not for IHT necessarily as the 2 properties and savings may not breach the 500K allowance when he house is left to direct heirs. also if Op's Mum is a widow it is quite probably that her late husbands allowance has not been used in which case the allowance for family home and other assets is one million

Obviously not sure what the houses are worth, but both will be part of her estate when she eventually dies. The inheritance tax could also result in your losing your home.

No, AA isn't a means-tested benefit and is not relevant when it comes to pension credit.