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.

OP - please seek proper advice - this is completely incorrect. On death IHT is payable if the estate is over the thresholds and as such there is no capital gains tax payable on death, instead the value of the property at death becomes the base cost for capital gains tax
purpises on a future sale. Indeed death is the best capital gains tax planning that exists ( black humour) .

The poster's mother just needs to complete the HJMRC questionnaire. The mother receives no rent so end of story - nothing complicated, no problems. You can provide rent free homes to 20 adult children if you want - there is no tax being evaded - it is really simple. Parent provides empty property and allows child to live there.

Other other with question about payments etc should take legal or tax advice as that is a different situation.

That is ONLY if you are treating it as a rental property for tax purposes while charging nothing - ie if you are claiming against tax for repairs and upkeep.

If you or your parents are funding repairs and the property is "off the books" for tax purposes then you can of course let them stay for no charge.

AA only increases the income threshold for pension credit but doesn’t automatically qualify a person for it if their other circumstances disqualify them. And HMRC wouldn’t be writing to her if there was a problem with a pension credit claim, it would be DWP. I think it’s more likely that HMRC are investigating why the house was sold at less than market value and why OP and her family are not paying market rent. They will have cross checked with land registry and will want to know why she has a second property but isn’t declaring a rent as taxable income because council tax records will show that OP is living there. It should be easy to sort out, but I think OP’s bigger problem here is that if her mum is elderly and will possibly end up in care, social services will assess all her assets for care fees - including the home OP is currently living in.

This. Tax situation is complicated here. It’s not just about tax on income she is or she isn’t receiving.

Yes you should be paying tax-and quite a bit as there's no tax relief on mortgage payments any more.
I think you need to transfer the property into your daughter's name and support her to make the payments. This would also ensure she doesn't risk loosing it in later life if you need care.

I think this poster should contact HMRC and clarify her position, because she’s not charging market rent to her daughter, only enough to cover mortgage and council tax. She also doesn’t mention whether she is covering any other bills or whether daughter is claiming any disability benefits, which may enable a reduction in things like council tax or heating (warm home discount etc).

Not sure it’s a good idea to transfer wholly into daughters’ name as OP would have no control over potentially bad future decisions, but possibly a 50/50 split would be better. If OP was to go into care and her daughter was still resident at the property as her only home, social services would be unable to include it in the financial assessment.

If this poster contacts hmrc she is likely to be hit with a bill for back taxes. Market rent or not it's classed as income and is taxable because she is purchasing a second property in her name. How much rent she pays will depend on how much she already earns - does the extra income push her over a tax threshold fi. Also she will be able to set various upkeep elements against tax. Better to get some independent financial advice before dealing with hmrc.

It's also not true that the property wouldn't count towards care costs if owned 50:50, it absolutely would. The daughter would be expected to buy her mum out or sell up to free up the money.

I'd say you should, at the very least, be reporting this income to HMRC

I think they will expect you to pay tax on it in some circumstances ....depending on your income, expenses etc

They WILL find out btw

Report it, any potential penalties are less if you come forward voluntarily.

HMRC becoming more like Big Brother Stazi every day. This is an elderly lady who has a disability or health condition who out of the blue is being asked about her OWN assets which she lawfully has arranged to help her own daughter and son in law. How did they know? Why were they sniffing around? That’s really upsetting for your Mum and just sorry she had that distress.

Unreal given the amount of elites and corporations who pay minimal tax never get held to account. +Now DWP soon can take £s directly from bank accounts and so likely only a matter of time before digital currency and in future they take first with onus on you to reclaim.

HMRC… eh chase the mega rich first!

Stop over-reacting. They're not "Stazi" at all. They've just asked a question and will almost certainly go away with no fuss when the OP's mother provides them with the answers as many posters have said.

Illegal tax evasion in the black economy is larger than legal tax avoidance by international firms. Both need to be tackled.

OP says her daughter is disabled. If a direct relative of the person going into care is either disabled or age 60+ and resident in the property as their only home at the time their relative goes into care, social services are unable to include the property in the financial assessment. They also have to have been resident in the home before the relative went into care. This is the law of the land. The house is exempted. However, the exemption only applies to the original home. If the daughter were to downsize, her mothers’ percentage share of the profit would be assessed for care fees. If the daughter moves out permanently or pre deceases the mother then the mothers’ share of the value would be assessed for care fees.

And no-one who jointly owns a property with someone who goes into care, and lives in that property as their only home can be forced to sell or buy them out to enable social services to assess for care fees. A charge would be put on the property so that at the point it is put up for sale social services can recoup fees.

But for any of that to apply @Rosscameasdoody wouldn't the mother and disabled daughter not have to be sharing a home?

No. In the situation the poster described the flat was purchased for her disabled daughter. It’s the disability that provides the exemption (or alternatively age 60+) for a direct relative resident there as their only home. Whether or not mum is also resident there is irrelevant, and in this case she wouldn’t be. The only other stipulation is that the direct relative would have to have been in residence before the person went into care.

Stop over reacting… whilst 🤔 eh over reacting in response 🤣… ok.

Tax avoidance is sophisticated. Lines can get blurred. The 1% are the ones to target is the point: https://www.lse.ac.uk/research/research-for-the-world/economics/sophisticated-tax-evasion-by-the-super-rich

As for black market economy targeting 10% of the population, 46% with incomes under £12,570… Nat Cen 2022 also noted:

• Younger people, people in full time education and the unemployed were most likely to be involved in the Hidden Economy. People who reported experiencing a more difficult financial situation were also more likely to be participating in the Hidden Economy, as were those who perceived their financial situation to have worsened since the beginning of the COVID-19 outbreak.

So no, targeting those who have the most - to pay their fair share in terms of priority needs tackled first and that’s where HMRC time/effort should be directed. Not at a disabled pensioner. IMHO.

HMRC do send loads of questions when they probably could just start with a few. The bottom line is the mother must fill out the form and the gist of the response is she lawfully allows her adult child to live rent free in the second home as do loads of people of course and there is nothing wrong with that. HMRC are probably just worried it is being rented out without rent declared.

HMRC do a lot of investigations of all kinds of people including high net worth people and others and recently there is a new system where the providers such as Ebay must now telll HMRC about sales by people (so now is a very good time to check if your online sales might be trading and if you exceed the £1000 a year tax free trading allowance.