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.

HMRC are useless. Been trying to get my UTR number back for 8 months to no avail. Just feed them breadcrumbs every few months and it should keep em off your arse

Your family sounds very caring and supportive of each other.

An explanation letter to the HMRC is probably the starting point. Are you an only child because if your mum is elderly then has she thought about gifting you the house now? (To avoid inheritance tax? If she lives another 7 years) It would also prevent this kind of issue arising in the future.

I was going to point this out - have you made plans for that OP?

This happened to me OP. Other way about. I own DMs house and she lives in it rent free. A quick call to HMRC who advised me to send a short letter explaining the situation. No request for bills etc.

Don't panic. We own a second hole my mum lives in rent free and it's not an issue. She just needs to inform HMRC that she's not receiving rent.

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The HMRC thing can be explained easily. I'd think about the inheritance position though. If her intention is that you keep the house on her death, you need to consider inheritance tax. In the current scenario where you and your brother inherit everything in equal shares, then if her house is worth less than yours, that would have to be sold and you'd have to find some extra money to equalise your brother's share of the assets. Plus IHT may be payable depending on the overall value of her estate.

To avoid this, she could gift you the house now in her lifetime. So long as she lives another 7 years, no IHT would then be payable on that part of her estate and it would also reduce the overall value of the estate, saving your brother IHT. If her house is worth less than yours then this would still result in him getting less than you, but she and he may be happy with this in the circumstances

Also this scenario can attract IHT on the parent's death as explained here: www.propertysolvers.co.uk/articles/can-i-buy-my-parents-house-and-let-them-live-in-it-rent-free/#:~:text=Allowing%20Family%20to%20Live%20Rent%20Free,-It%20is%20absolutely&text=However%2C%20if%20the%20theoretical%20rental,to%20Inheritance%20Tax%20(IHT).

Sorry - didn’t explain properly. I bought the house outright so it has never belonged to my mother.

Sounds like someone has reported you/your mum 🙄but it doesn't sound like either of you have anything to worry about. You just need to speak to HMRC to clear it up.

Just to clarify AA isn't means tested - so this isn't a consideration either.

Hopefully this is soon sorted.

no it doesn’t - sounds like HMRC have cross referenced land reg and SA and found people who have more than one property and aren’t declaring rent.

I think people are worrying far too much about reservation of rights for IHT purposes, deprivation of assets, no rent charged and all the rest. She just needs to fill in the form. Loads of parents help children and it rarely causes IHT or care home issues - many people will have to fund their own care home anyway and just 1 in 5 actually need a care home in the end. I have given all my adult children money to buy a property and that is perfectly lawful and very normal. Adult children also live with me at home and again that is lawful too and yes it might feel unfair but it not a gift for IHT purposes.

Sadly most of us will never get any state help at all for care home costs anyway so the issue of if you help your children you are depriving yourself of assets that will be needed for your care home may not arise. Lots of people have enough pension money to fund it anyway or their own house they could sell and I think the average stay in a care home is only 4 years.

HMRC have sent the 24 page form because they think the person is taking rent in cash and not paying tax on it. That is not true. So completing the form will just make that clear.

(my post above saying "you not from her " should have been "her not you" - it is the mother not the daughter from whom HMRC want to hear)

Why on earth would she get pension credit with £100k in the bank??

May I ask why not to do this.
I have a second property we eventually hope to rent out, should I be declaring it, if not why not?

If you receive rent then you must report that and pay tax.

You don't have to complete a tax return if you're not receiving taxable income

interesting - I have a second house, occupied by a relative - they pay the bills / CT but I don't charge them rent. Haven't had a letter yet but will be forewarned if one appears

Yeah - fellow accountant here - that's bollocks!

You don't pay income tax when you haven't earned any income!

https://community.hmrc.gov.uk/customerforums/ifp/ff624777-31fc-ee11-a81c-000d3a0cf07e#:~:text=Admin%202%20Response-,Hi%2C,expenses%20that%20can%20be%20claimed.

I second the PP comment that your parents need a better accountant!

No Mum lives om her house (house 1 primary residence)

Mum buys house 2 in her name (second home).

Daughter and SIL live in house 2. Pay no rent.

No tax due in relation to either.

Simple explanation to HMRC is all that is required.

@DollyPumpkin There may be an issue which could potentially arise if your mum ever goes into a care home and all other assets are used up and the house you live in needs to be sold at some stage as it belongs to your mum.

This!

Could you clarify this as I’m getting stressed reading this 😬 I bought a flat for my daughter to live in as she’s ADHD and while she works a call centre job could never organise herself to rent or buy by herself. She pays me enough to cover the council tax and mortgage payment but I’m not making any profit and has to use £20k savings as deposit. I’m worried after reading all this I could be made to pay tax because she gives me the money mortgage and tax? Any advice greatly received!

Similar query on a Property site.

The occupant deemed in that case which arose out of a Will to be Remaindermen under 2004 Housing Act. And OP situation appears similar.
The legal advice to seek legal advice on how remainderman meets obligations under Housing Act.

Money laundering is prevalent in property dealings and claiming rent is paid cash in hand is the way it’s done.

Thats why HMRC are making enquiries and OP must convince them that this not the case.

Its probably too late for your mum to transfer the property into your name because it will be viewed by cash strapped councils as deprivation of assets in consideration of care fees and is fraud.

@Sassoon Yes you need to be careful there - just because you think you’re not making any “profit” - but you might be because you can’t deduct the mortgage payment, not even all the mortgage interest anymore.

if she’s covering your whole mortgage payment, at the end of the term you are going to own the property.

as mentioned, HMRC do cross reference property ownership so may catch up with you,
work out how much “profit” you make after deducting council tax and other costs (but not mortgage).

And to follow up. OP said her mum is liable for service charge and ground rent suggests there is a landlord/management company and she owns a lease to these properties.
It will depend on the legally binding covenants in the lease agreement.
The first thing is read the lease(s)

No it wouldn’t, there could be huge tax liabilities from doing that.