Renting out my Daughters House

[OBE]

OK great - I'll start researching that then now!

Thanks for your help Section 44

[pqtaxation]

It depends on what you want to do, do you want to lend them money or buy their house (clearly different transactions)

It’s possibly not as black and white as either 1) you want to buy their house or 2) you want to lend them money (interest free).

A grey alternative is that you want to lend them the money but be rewarded for doing so but you’re happy for them to benefit from any increase in the future capital value of the house (however unlikely that seems currently) until your death.

So all they have done so far is to replace their old mortgage with one from you of how much – or is that £140k? You say your estimate of current market value is about £140k. Presumably they therefore have very little, if any, equity in the house but to make sure what chargeable gain/loss do you estimate they would realise if house would sell for £140k (= £140k- £2k selling costs- purchase price- completion costs- cost of capital improvements). How long did they live there as their main residence?

Leaving the legal and beneficial ownership of the house in their names does provide a shield from future taxable gains - because it was their PPR so the last 3 years of ownership before sale will qualify and they will be eligible for lettings relief.

What gross rent per year might house let for? You could charge the same BTL interest rate and a deferred arrangement fee as a third party as well as a property management fee (assuming you’ll do the management) which will in effect re-direct the net rental income from them to you– ideally they’ll break even.

The main downside of leaving house in their names is if they separate in future or daughter dies bequeathing son in law everything. I suppose your mortgage agreement might say that in the event of their separating or she pre-deceasing you the mortgage becomes due for repayment and the son in law will forego any gain above a sales price of (say) £140k. Alternatively if they currently have no equity in house the son in law could transfer his 50% interest for no consideration to your daughter (but not if they have already moved out as then future relief on any gain in the value of his former 50% interest would be lost) and her will could devise her entire interest in the house to you.

Just some possible ideas. As you say after deciding in principle what you want to do you should prepare a mortgage agreement and have a professional approve its form and have it recorded as a first charge.

[section 44]

A grey alternative is that you want to lend them the money but be rewarded for doing so but you’re happy for them to benefit from any increase in the future capital value of the house (however unlikely that seems currently) until your death.

I don't see anything grey about that, you are refering to lending them money.

[OBE]

Thanks pqtaxation

The house was purchased in 2004 for £132500. We lent then £120K, interest free and she put the rest down. The house was in her name. In 2007, she and her then boyfriend remortgageed the property, gave us the £120K back and the house went into joint names. Its now worth about £138/£140K and they have £106K outstanding mortgage. But they needed the ful £140 to be able to buy the one theyre buying now - they haven't moved out yet - that's expected to be in 2 weeks time.

We hope to get about £575/600 per month rent.

So with all that info - how would it best work? And sorry to be thick but what does BTL interest rate mean? Do you mean charge them the same interest rate as rent, reducing it slightly for expenses etc to arrive at a net result for them and the same result effectively for us - we then declare and pay tax on the interest etc ?
And doing it this way, who is the landlord for the tenancy agreement - us or my daughter and hubby?

[pqtaxation]

Your options seems to be between buying their current house from them for £140k or leaving it in their or your daughter’s name(s) but with your £140k loan secured as a first charge against that house ( but that house may not realise £140k after costs ) and, possibly, the new house (as a second charge on second house to provide greater security for you).

Your buying their current house for £140k will cost the stamp duty, they will have no responsibility and you have all the risk of voids or price deflation but have any gain if you sell it in future for more than £140k.

Leaving it in their names with a mortgage of £140k avoids the costs of transferring ownership to you and shields any future gain from capital gains tax because it has been their main residence. At a rental of £600/month or £7200 per year that is a gross rental yield of about 5% ( = 7200/140000*100). If you charge an interest rate of 4% on your loan (which is a little below the curent market rate for buy to let BTL mortgages) and a small management charge then they will have about a breakeven net rental income (gross rental income less interest less management charges less other deductible expenses).

If son in law retains his current interest in the house (presumably 50%) and if they split up in future his involvement might be an unnecessary complication. His equity in the current house looks to be about £15k ( = 50% of 138 sales value less 2 selling costs less 106 mortgage). He could transfer his half interest before they move out to your daughter for a consideration of that £15k which would increase his share of the equity in the new house.

As to renting the house, if you own the house the lease will be in your names but if ownership remains you’re your daughter/them it’ll be in owner’s name (with you as owner's managing agent).

You and them should agree the best alternative for the specfic circumstances and have your solicitor concur and prepare any written documentation required (e.g mortgage(s), deed of transfer etc)

[OBE]

Many thanks pqt - that's extremely helpful (and I have realised what BTL means - duh!!)

We are really only trying to avoid SDLT and Solicitors costs - so keeping it in their name, with a legal charge would be enough for now because we don't intend to keep it for long anyway. I accept we have the son-in-laws position, but, Interestingly, they already have a deed of trust for that property because my daughter put the initial deposit down and so when he moved in, and they remortgaged and then married, we wanted to protect her position - so as it stands now, he has no equity in the house because it's all hers. The deed says she gets all proceeds, after mortgage costs, up to a sale value of £50K. Any proceeds left after that are split 50/50. - I assume the deed remains whilst the house is in their name so I think we're covered?

There is one further complication though - we remortgaged our house to raise the £140K. Presumably, if they pay us interest at 4% on our loan to them of £140K, for tax purposes, we can claim the interest we pay on our remortgage against that? We are only paying 2.5% so there will be a profit

Finally, would the tenants rent have to be paid to their bank account or could uit go to ours?

Thanks again pqt - really grateful

[pqtaxation]

I appreciate you are not intending to retain the property for long - though there can be no guarantee its saleability will improve in the next few years – and therefore wish to avoid SDLT and to keep solicitors’ costs to a minimum. But in view of the additional circumstances you have mentioned in your last post, your not taking professional advice expressly tailored to all of your specific circumstances might prove to be foolish in hindsight.

It seems that, as you son in law has no equity in house, there is no advantage (other than inconceivably not having available from a second shield of his upto £40k lettings relief) to keeping him involved and if they did separate then there may be unwanted complication at a difficult time. Transferring his beneficial interest to your daughter and removing him from the legal title might therefore, for the small cost involved, be a sensible immediate step before they move out (so she takes on his main residence relief on his benefical interest).

On the loan I suppose you can say you have entered into the business trade of mortgage financing and deduct your mortgage interest costs relating to your £140k mortgage which is presumably interest only. Your mortgage agreement with your daughter should presumably charge your interest rate plus a margin (e.g. you are paying base plus 2% so you will charge base plus say 3.5%). Ideally she will break even to make a small loss (after any non-cash wear and tear allowance) on taxable net rental income.

On bank accounts, probably best to have a joint account in names of your daughter (as owner) and you (as managing agent) for rent and disbursements from the statements for which it will be easy to prepare the accounts for the lettings business for her tax return and for your inocme from interest/managing agent.

Children – are their problems not forever!!!

[OBE]

Well they certainly seem to be!! I'm not having anymore! (says she of pension age!)

Many thanks pqt - really grateful you've taken the time to respond so comprehensively - very helpful