Tax on rental property

[rubberduck68]

I’m asking on behalf of my parents who want to rent out their home so that they can go and live with my dad’s much younger sister and her partner (they will pay them rent.) They don’t work, both have a state pension. How much income tax would they have to pay on the income from their rented out home? The rental agent estimates they will get £2,500 pcm for rent, which would be minus a 15% fee to fully manage it per annum.

I’m assuming they are basic rate tax payers, and that there is no mortgage, so they will pay 20% of the net income above their personal allowance. They can deduct management fees, any repairs and maintenance that have to be undertaken. They most likely will need to arrange for an Electrical Condition report to be done along with any remedial works which are identified, and depending on area, have an EPC conducted. They can also deduct from tax the insurance, and make sure it is landlords insurance.

It might also be worth them doing some tax planning. If it is no longer their main residence then they will become liable for capital gains tax. Also when it comes to inheritance tax they won’t be able to utilise the main residence allowance which adds another £175k each to their individual £325k allowance. Although this might be offset by the fact that capital gain gets wiped out upon death.

If they sell it following renting they will be subject to capital gains tax also.

They will pay an agent fee of around 10-15% of the rental income depending on the service offered.
They will be liable for all maintenance and regulatory compliance issues (Gas safety if applicable, Electrical safety, CO2, Legionnaires.
There may be a local authority licencing fee.
Landlord insurance
Then tax at their marginal rate on the rest of the income (20% up to c50k) and 40% (50k upwards)
They will need to pay capital gains tax for the months it has not been their main residence when they dispose of the property (not payable if they die - then just IHT due).
They also need to know what they would do if they had difficult tenants who stopped paying. There could be a 12 month delay and court costs before they could get them to leave.
They really need some professional advice. They could eg sell the property, invest the money in something absolutely safe like government bonds, and move into sheltered accommodation. Much less hassle.

As a rough calculation...

2500x12x0.85/2= £12750 income EACH per year.
That will be added to their other taxable income, then tax paid on that.

They will need to do a tax return.

Why do they all want to live together? Is there a 'quid pro quo' of care expected from the younger sister and partner when the time comes? Why not sell up and buy a (smaller if needed) place near the sister - no issue with CGT, tenants messing the former family home up, more independence for each couple - ?

Thank you all, I will pass this on to them.

I just wanted to send a link about Gapital Gains when selling a property you've previously lived in but now rent out. They may not end up paying any Gapital Gains depending on how long they lived in the property prior to renting, we paid none on a property we rented out for a few years but lived in for 10 years prior so this may also apply to your parents if they have owned their property for many years. May be helpful

www.gov.uk/tax-sell-home/let-out-part-of-home#:~:text=You%20get%20full%20relief%20for,living%20there%20at%20the%20time

Honestly - far less hassle to sell and downsize and free up capital to enjoy life.

Also, be aware that the tax is payable by whoever owns the property, not who the rent is paid to.
So if one of them owns the property then they will be liable for all the tax due. If they are joint owners then the tax bill is split between them.

You haven't mentioned how large the property is BTW.
There are some additional rules if the property is rented out as a HMO i.e. house-sharers who are not related to each other or if it's occupied by a family.
We have assumed no mortgage on the property, but there are additional tax rules if there is still a mortgage.

This is what I have been telling them but it's falling on deaf ears!! They are moving to Wales to help my Dad's younger sister with her smallholding. It will be really good for them, lots of open space and fresh air, but I wonder if they are worried it won't work out and want to come back?