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is mortgage reimbursal taxable?

Hi, my client has taken out a (repayment) mortgage and purchased a house for his elderly father to live in, as the father was unable to obtain a mortgage himself. The father reimburses the whole of the mortgage payments made by the son. 

I believe that the reimbursements are taxable on the son as property income, unless a declaration of trust is drawn up naming the father as holding the beneficial interest. (The father also contributed the deposit and made a lump sum payment towards the mortgage, these amounted to a third of the purchase price in total). 

I would be very grateful to receive any comments as to whether my understanding is correct.  

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A Question of Rights

I think this comes down to the rights his father has over the house.

If he has no tenancy, and has signed a declaration for the mortgage company, as my mother had to, accepting the fact that he has no right to remain in a repossession situation, then all the payments made by the father are gifts.

If they have created a formal tenancy etc then it could be rental income.

 

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By ACDWebb
25th Feb 2013 10:34

Might you not have a mismatch of

interest paid & received, with the interest element of the payment taxable on son, but the mortgage interest paid not allowed as a corresponding deduction?

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25th Feb 2013 13:05

mortgage reimbursal as gifts

Thanks for your comment Marion - I don't believe that the father has a tenancy agreement or has signed anything for the mortgage company, do you mean that this could be viewed as a series of monthly gifts from the father to the son?

Would other Aweb members agree?. 

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25th Feb 2013 13:31

Interest

Thank you ACDWebb, I took the view that HMRC would see the mortgage reimbursements as rental income, as the son legally owns the property, and that mortgage interest payments would be deductible against this.

However this is not the reality of the situation, which is more of the son taking on a liability on behalf of his father. I was hoping to find a way to reflect this that HMRC would find acceptable.

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Yes

I was in a similar position in that my mother moved into our separate bungalow. The mortgage company required certainty that she realised no rights accrued to her through living there.

She made a monthly contribution to our budget and HMRC agreed that this was not a taxable situation. The contributions were effectively gifts out of disposable income so did not have IHT implications although the lump sum did count as a PET.

A tenancy agreement or rent book would imply rights to remain and taxable rental income. 

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