Renting a house on behalf of someone else

[jodyflett]

Hi all

I have a question in releation to the legal/tax implications on the following arrangement.

My Parents have moved out of the country but still have a property in the UK
My sister wants to live in their house
My sister already owns a house that she plans to rent out. (Has lived in the house for 8 years)
My Sister wants the rent from her house to go direct to my parents, as they will no longer be getting rent from their property.

The question is: Can my parents rent my sisters house out in place of my sister, so that my sister does not see the money. i.e. the money goes direct to my parents without my sister having it as an income and therefore paying income tax on it before passing the money to my parents, Or does the rental have to go through my sister?

It seems reasonable to me that this should be possible, but just can't see how it would need to be set up.

Any suggestion greatfully received.

Thanks

J

[jbaileycta@btopenwor]

I am afraid this scheme will not work, as all rents on UK property are taxable in the UK, regardless of where the owner of the property lives. There is a scheme for collecting tax from non-resident landlords, but there is no space to go into it here.

One way to achieve the income tax effects you want would be:

Sister gives her house to parents (exempt from CGT, provided it has always been her main residence). Parents now entitled to rent from the house - but rent will still be liable to UK income tax, as described above.

Parents give their UK house to sister (exempt from CGT either because it was their main residence, or if not, exempt anyway provided the parents are not UK resident in the year they make the gift, and remain non UK resident for five complete tax years, but they need to consider what tax might apply in the territory where they are resident). Sister lives there as her main residence, which means she would be exempt from CGT on a future sale.

This is only the bare bones of something that would need a lot of thought before it was done, and which could also be "tweaked" to produce slightly different results (for example, sister grants a lease on her current house to the parents rather than an outright gift).

Your sister and your parents need proper professional advice before taking any action, as this situation involves several different UK taxes and probably some overseas ones as well. I would be happy to discuss fees for the UK end of the work.

James Bailey
Chartered Tax Adviser
jbaileycta@btopenworld.com

[jodyflett]

Hi James

Thanks for your reply. So basically what you are saying is it can be done in some way? Gifting the houses to each other would not be an option as the values of the houses are not the same, additionally there is nothing to say that my parents can't let my sister live in their house rent free, which is what would happen anyway.

This issue is the right of my parents to take rent on my sisters property. In theory am I correct in assuming that my sister can sign over the mangement of the property to my parents in some way, thereby giving them the right to the rent?? Obviously they will be liable to pay whatever tax they need to pay but essentially this would achieve the end goal, which is my sister living in my parents house and my parents renting out my sisters place.....

Thanks

J

[jbaileycta@btopenwor]

Dear Jody

There is no easy way for your sister to transfer the right to the rent to her parents while still owning the property.

It will not surprise you to learn there is a whole raft of legislation designed to frustrate attempts by those entitled to income to transfer it to someone else - particularly to someone outside the UK.

As far as I can see, the reality of the situation is that:

1. Your sister lets her property to a third party - she will be liable to UK tax on this rent.

2. She moves into your parents' UK property, and pays them a rent equivalent to the rent she is getting for her UK flat - your parents will be liable to UK tax on this rent, under the non-resident landlords scheme.

It is difficult to see how to get round these facts, unless I have misunderstood something.

James Bailey