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Living Rent Free In A Property Bought By Parents


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#1 mee

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Posted 18 March 2009 - 02:41 PM

Hello everyone - this is my first post!

We're in a in a unique situation - my partners parents would like to buy a 2nd property as an investment property. They would like us to live in it rent free, giving us the opportunity to save the cash we are currently paying in rent to a private landlord. We will amass a sizeable chunk of cash to use as a deposit to purchase the house from them before they retire (10 years). It's an excellent opportunity for us all.

My question is, from a legal standpoint, where do we stand? Are we effectively classed as renting tenants, even though we are living rent free, and therefore will we need to get a tenancy agreement drawn up? It seems a bit silly as we obviously trust each other enough to put ourselves in this situation, however if we need to satisfy legal requirements then we'll obviously have no choice but to do so.

And secondly, and I'm probably just being paranoid here (that's what modern world living does to you), we're not going to be hit with some kind of bizarre tax due to having the benefit of living rent free are we?

If there's anything else you guys (and girls!) can think of from a legal point of view that we may not have considered, we'd really appreciate any advice, pointers etc. We're all more than happy and comfortable with the situation from a risk and moral standpoint.

Many thanks in advance,

Mee!

#2 renterbob

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Posted 18 March 2009 - 03:23 PM

Hello everyone - this is my first post!

We're in a in a unique situation - my partners parents would like to buy a 2nd property as an investment property. They would like us to live in it rent free, giving us the opportunity to save the cash we are currently paying in rent to a private landlord. We will amass a sizeable chunk of cash to use as a deposit to purchase the house from them before they retire (10 years). It's an excellent opportunity for us all.

My question is, from a legal standpoint, where do we stand? Are we effectively classed as renting tenants, even though we are living rent free, and therefore will we need to get a tenancy agreement drawn up? It seems a bit silly as we obviously trust each other enough to put ourselves in this situation, however if we need to satisfy legal requirements then we'll obviously have no choice but to do so.

And secondly, and I'm probably just being paranoid here (that's what modern world living does to you), we're not going to be hit with some kind of bizarre tax due to having the benefit of living rent free are we?

If there's anything else you guys (and girls!) can think of from a legal point of view that we may not have considered, we'd really appreciate any advice, pointers etc. We're all more than happy and comfortable with the situation from a risk and moral standpoint.

Many thanks in advance,

Mee!


Move in, head down, no agreement necessary......you're lucky, enjoy it......
'I was convinced that the shere size of the global housing bubble would bring everything down when it collapsed and that we would end up in a very severe recession.'
'I have long held that the HPC would see at east 50% off house prices. I recently revised this to 60%. Why so dramatic? Again, another no-brainer'
RealistBear Oct 24, 2008

#3 TeddyBear

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Posted 18 March 2009 - 03:48 PM

what if you and your partner break up somewhere down the line? Will you be paying the money into a joint, ring-fenced account?
LONDON, April 5, 2004 – The Rt Hon Gordon Brown, MP, Chancellor of the Exchequer, today officially opened Lehman Brothers’ new European headquarters building at 25 Bank Street, Canary Wharf, London.

Commenting on the event, the Rt Hon Gordon Brown, MP, Chancellor of the Exchequer, said: “I would like to pay tribute to the contribution you and your company make to the prosperity of Britain. During its one hundred and fifty year history, Lehman Brothers has always been an innovator, financing new ideas and inventions before many others even began to realise their potential. And it is part of the greatness not just of Lehman Brothers but of the City of London, that as the world economy has opened up, you have succeeded not by sheltering your share of a small protected national market but always by striving for a greater and greater share of the growing global market.”

#4 24gray24

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Posted 18 March 2009 - 04:13 PM

Don't you like your gf's parents???

As a HPC person, it's your DUTY to tell aforesaid parents not to be so silly. Buy an investment property in this climate? Are they mad? And you're just letting them do it???
2012 prediction:

banks fall like dominoes in 2013, as funds are withdrawn into PMs.

Sarkozy, Obama and Merkel all fall from power.

the british housing crash is not gradual and slow, it drops like a stone on the day interest rates rise.

#5 mee

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Posted 18 March 2009 - 04:14 PM

what if you and your partner break up somewhere down the line? Will you be paying the money into a joint, ring-fenced account?


Thanks for your reply - as I said in the original post though I'm just looking for advice about where we stand from a legal standpoint. All the risk/moral issues we're aware of and comfortable with.

Mee.

#6 pyracantha

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Posted 18 March 2009 - 04:50 PM

Thanks for your reply - as I said in the original post though I'm just looking for advice about where we stand from a legal standpoint. All the risk/moral issues we're aware of and comfortable with.

Mee.


If it's a second home there will be capital gains issues. Has this been factored in?

#7 24gray24

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Posted 18 March 2009 - 04:53 PM

If it's a second home there will be capital gains issues. Has this been factored in?

:blink:
2012 prediction:

banks fall like dominoes in 2013, as funds are withdrawn into PMs.

Sarkozy, Obama and Merkel all fall from power.

the british housing crash is not gradual and slow, it drops like a stone on the day interest rates rise.

#8 mee

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Posted 18 March 2009 - 04:55 PM

Don't you like your gf's parents???

As a HPC person, it's your DUTY to tell aforesaid parents not to be so silly. Buy an investment property in this climate? Are they mad? And you're just letting them do it???


No, they're not mad. Far from it. And no, we're not taking advantage of them as your reply might suggest.

They are purchasing a property that is well below the market value, even in the current climate (it's a repo that needs modernising). The aim of this is for them to get a return on the property, over a period of 10 years (minimum - could be up to 15) that would be in excess of what they would have got putting the same amount of money into savings over the same period of time. BUT, at the same time, they have helped to secure their daughter's future, and that of their future grandchildren - as in that 10-15 year period, we'll have the potential to have saved at least £60k (worst case - this is based purely on money we would save in rent - we'll be saving additional on top, circumstances dependent). This we would use as a deposit to purchase the house from them.

Mee.

#9 mee

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Posted 18 March 2009 - 04:58 PM

If it's a second home there will be capital gains issues. Has this been factored in?


Thanks - yes that has been discussed and factored in.

mee.

#10 cartimandua51

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Posted 18 March 2009 - 05:02 PM

We're in a in a unique situation - my partners parents would like to buy a 2nd property as an investment property. They would like us to live in it rent free, giving us the opportunity to save the cash we are currently paying in rent to a private landlord. We will amass a sizeable chunk of cash to use as a deposit to purchase the house from them before they retire (10 years). It's an excellent opportunity for us all.

My question is, from a legal standpoint, where do we stand? Are we effectively classed as renting tenants, even though we are living rent free, and therefore will we need to get a tenancy agreement drawn up? It seems a bit silly as we obviously trust each other enough to put ourselves in this situation, however if we need to satisfy legal requirements then we'll obviously have no choice but to do so.

And secondly, and I'm probably just being paranoid here (that's what modern world living does to you), we're not going to be hit with some kind of bizarre tax due to having the benefit of living rent free are we?


Mee!

This is a well established situation from a tax point o9f view - though more commonly for ancient aunties / retired nannies etc - & is known as a let below or not at market rent. Note that market rent in this context does NOT mean what you could get on the open market, it means the rent which, taking one year with another, will at least cover costs. So with a not-at-market-rent property it's guaranteed there will be a loss every (or most) years.
Now this is a situation guaranteed to give the Inland Revenue a bad attack of the vapours, so there is a rule that any losses can only be carried forward and offset against future profits from that same property ((&, I think tenancy - so no using the losses against an eventual let at full market rate. But check this, it's a long time since I had to look this up). Are your parents aware of this or did they think they could offset against other income?

Are they having to borrow money? the mortgage co may have something to say about it if so read the small print.

I can't see how you can be renting tenants as you are offering no consideration, and no consideration means no contract. Perhaps this is a situation where you need to pay a "peppercorn rent" to regularise this - consideration had to be "valuable" - i.e. capable of having a value put on it, but does not have to be "adequate" - i.e. doesn't need to be market rent.
Unless you are employees of the parents I can't think of any strange benefits-in-kind you might be taxable on. (Other than Council tax, of course)

Clear as mud?
You can sort out the legals easily enough - any competent solicitor will have experience of the aged-aunties type free let; but the real problem is what happens if you & partner split up - can the parents throw you out?
DON'T say it's not a concern - it ALWAYS needs to be written into an agreement.
My opinion only, I am not a lawyer, do your own research blah blah - but sounds a good opportunity.
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#11 24gray24

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Posted 18 March 2009 - 05:19 PM

No, they're not mad. Far from it. And no, we're not taking advantage of them as your reply might suggest.

They are purchasing a property that is well below the market value, even in the current climate (it's a repo that needs modernising). The aim of this is for them to get a return on the property, over a period of 10 years (minimum - could be up to 15) that would be in excess of what they would have got putting the same amount of money into savings over the same period of time. BUT, at the same time, they have helped to secure their daughter's future, and that of their future grandchildren - as in that 10-15 year period, we'll have the potential to have saved at least £60k (worst case - this is based purely on money we would save in rent - we'll be saving additional on top, circumstances dependent). This we would use as a deposit to purchase the house from them.

Mee.


Okay, now it all begins to make sense.

I agree with the OP: have parents go and see an accountant about the tax. and go and see a lawyer about whether it's better to leave it vague, no rent, leave on reasonable notice if they want to sell etc. Something should probably be in writing at least to cover DIY; if you re-do the kitchen and wiring at your own expense, you don't want parents to be able just to sell it and keep all the money without re-imbursing you.
2012 prediction:

banks fall like dominoes in 2013, as funds are withdrawn into PMs.

Sarkozy, Obama and Merkel all fall from power.

the british housing crash is not gradual and slow, it drops like a stone on the day interest rates rise.

#12 TeddyBear

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Posted 19 March 2009 - 12:49 AM

If the parents need long term care at some point, it would be an asset of theirs that would be taken into account I believe. There would also be inheritance tax issues to look at.
LONDON, April 5, 2004 – The Rt Hon Gordon Brown, MP, Chancellor of the Exchequer, today officially opened Lehman Brothers’ new European headquarters building at 25 Bank Street, Canary Wharf, London.

Commenting on the event, the Rt Hon Gordon Brown, MP, Chancellor of the Exchequer, said: “I would like to pay tribute to the contribution you and your company make to the prosperity of Britain. During its one hundred and fifty year history, Lehman Brothers has always been an innovator, financing new ideas and inventions before many others even began to realise their potential. And it is part of the greatness not just of Lehman Brothers but of the City of London, that as the world economy has opened up, you have succeeded not by sheltering your share of a small protected national market but always by striving for a greater and greater share of the growing global market.”

#13 johnny5thumbs

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Posted 19 March 2009 - 12:59 AM

If the parents need long term care at some point, it would be an asset of theirs that would be taken into account I believe. There would also be inheritance tax issues to look at.


There could be income tax implications for your partner's parents - HM Revenue & Customs now penalise owners who let their sons / daughters live rent-free or reduced rent. They (if they find out) could assess the market rent, and tax the your partner's parents on the difference. Maybe best to check with an accountant on the exact position in your case.

#14 johnny5thumbs

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Posted 19 March 2009 - 01:02 AM

There could be income tax implications for your partner's parents - HM Revenue & Customs now penalise owners who let their sons / daughters live rent-free or reduced rent.


I'm talking about offspring who live, like yourselves, in a separate house or flat owned by the parents - not together in the family home - tax law hasn't got THAT bad yet ! <_<

#15 Haventaclue

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Posted 19 March 2009 - 01:16 AM

There could be income tax implications for your partner's parents - HM Revenue & Customs now penalise owners who let their sons / daughters live rent-free or reduced rent. They (if they find out) could assess the market rent, and tax the your partner's parents on the difference. Maybe best to check with an accountant on the exact position in your case.


This is not correct. You are in a common position and this is an acceptable arrangement by all interested parties, including the tax man. The key person here is your girlfriend. As a family member she can indeed live in her parents '2nd home' (even if they have 3 or 4) as you are intending to do. The benefit to the parents is that they do not need a BTL mortgage to purchase the property, and there is no tax implications as no income, as it is correctly being used by a family member.

The only place Ive heard of governments charging tax on 'potential' rent values of empty property is in Spain. It has not happened here.

From a 'tenant' point of view, your talking about your girlfriends parents?????? Why would you want to abuse their hospitality by living rent free then make some attempt down the line to 'claim' some right to the property? Take this generous offer for what it is, and enjoy some security for a while, youve many years ahead as a mortgage slave.....




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