Property income - mortgage interest paid but not sharing in ownership

Property income - mortgage interest paid but...

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My clients, Mr and Mrs A, helped their two children (practically and financially) to purchase and convert a property by remortgaging their private residence (approximately one-third of the total cost). The two children took out a mortgage on the property. The intention was that the property would be converted into two flats, one for each child's use as a private residence. However, it was then realised that three flats were possible so in the event the conversion was into three flats. The two children reside in one flat each but the third flat has been let and it has been agreed that the rents should all be retained by Mr and Mrs A. The rents are close in value to Mr and Mrs A's mortgage cost.

The solicitor has confirmed that Mr and Mrs A have no beneficial interest in the property.

1. Can Mr and Mrs A claim the whole of the interest as an expense of letting, one-third or none?

2. Should this be reported as a property partnership with two partners having a nil percentage profit share or simply as Mr and Mrs A's joint property business?

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By snopes
14th Sep 2009 14:30

If...

...the parents do not have any beneficial interest in the property they cannot have any beneficial interest in the rents either so the rents cannot be assessable on them but must be assessable on the beneficial owners - ie the children.  The children cannot deduct interest expense incurred by the parents but should be able to deduct a portion of the interest they incur on their own mortgage because it is they - not the parents -  who are actually letting the third flat which they - not the parents - beneficially own.

ebenezer cuckpowder

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By John R
14th Sep 2009 14:48

But is there a license to occupy?

Although the parents do not have a beneficial interest in the freehold is it not the case that they must have been given a licence to occupy the third flat and have then sublet it? The parents have clearly been given permission to sublet albeit that there is nothing in writing.

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By snopes
14th Sep 2009 15:40

The parents...

...are not occupying the flat because the actual tenants are doing that. Matters could be arranged for the future so that the children let the third flat to the parents who then sublet it to the tenant. Then the parents would  be assessable on the rents they receive from the tenant and would get a tax deduction for the rent they pay to the children (if any). But the parents would still not get a tax deduction for the interest they pay on their mortgage because it is not incurred for the purpose of earning the rent from the tenant - it is actually incurred for the purpose of lending  or gifting money to the children.

ebenezer cuckpowder

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