Share this content
13

Rent or Interest

Rent or Interest

Didn't find your answer?

Search AccountingWEB

Grandmother loans funds to granddaughter. Granddaughter purchases a house in her name (from third party through lawyers, legally documented etc.). Granddaughter is a student and lives in house herself and charges student friends rent, the granddaughter also collects a nominal rent from herself. The granddaughter sets the level of rents.

Once a month total rents (including granddaughters) are added up and any expenses are deducted and the net amount is paid from the Granddaughter to the Grandmother.

If the property is sold (or re-mortgaged at some stage) then the Grandmother will receive her loan funds back in full and Granddaughter will be entitled to any increase in value.

I act for the Grandmother - question is the money she receives Rental Income or Interest?

I think it is interest at a variable rate but wanted to double check and see if people are in agreement or not, and if there is any other angle I am missing?

Thanks for any input you may have. 

Replies (13)

Please login or register to join the discussion.

avatar
By tthrupp
09th Nov 2011 12:12

I would disagree and I would say its rental income?

Firstly it would be allot easier to account for if you deemed it a Rental property directly from the Grandmother and she dealt with the income and expenses? Granted this may give her a slight tax bill but this depends on her situation with other properties or her tax return?

The agreement on the increase in house value is between grandmother and grand daughter, and these monies could surely be gifted as a "gift of love & devotion" I’m sure that’s a lawyers/solicitors sector though....

That is how I would deal with it anyway...

Thanks (0)
avatar
By pauld
09th Nov 2011 12:12

interest?

its not rental income as that is the grandaughters. Have they agreed that the loan attracts interest ? If not, cant it just be treated as part repayment of the loan?

Thanks (0)
By cfield
09th Nov 2011 13:08

Who owns the house?

Surely it depends on whose name the house is actually in. The OP is a bit unclear on this as "Grand-daughter purchases a house in her name" does not indicate whether it was her or her gran.

Assuming it is owned by the grand-daughter, then she is responsible for the rent and could probably claim any amount shared with her gran as a "management expense" although it would be better if it was on a legal footing. The grandmother would then have to declare that money on her own tax return, probably as miscellaneous income although interest would be better if she can utilise the 10% band.

If the grandmother owns the house then the grand-daughter is effectively acting as her letting agent and there is no loan between them. The grandmother would then be responsible for the rent and could claim any amounts shared with the grand-daughter as a management expense, although again it would be preferable to put it on a legal footing as opposed to this somewhat vague arrangement. The grandmother would then have to pay capital gains tax on any increase in value when the house is sold. If she then chooses to pass this on to the grand-daughter, I would imagine it would be a PET for tax purposes.

If they both own the property then they should each declare the proportion of the rent equating to their ownership (50/50 unless they are tenants-in-common with a different ratio) and any amounts they pay each other in excess of their rightful share should probably be declared as miscellaneous income by one of them and claimed as an expense by the other, unless it can be treated as a gift, which would probably be within the IHT allowance of £3,000 per annum.

Anyone disagree?

Chris

Thanks (0)
Replying to Locutus:
avatar
By tthrupp
09th Nov 2011 13:12

Grand Daughter

cfield wrote:

Surely it depends on whose name the house is actually in. The OP is a bit unclear on this as "Grand-daughter purchases a house in her name" does not indicate whether it was her or her gran.

Assuming it is owned by the grand-daughter, then she is responsible for the rent and could probably claim any amount shared with her gran as a "management expense" although it would be better if it was on a legal footing. The grandmother would then have to declare that money on her own tax return, probably as miscellaneous income although interest would be better if she can utilise the 10% band.

If the grandmother owns the house then the grand-daughter is effectively acting as her letting agent and there is no loan between them. The grandmother would then be responsible for the rent and could claim any amounts shared with the grand-daughter as a management expense, although again it would be preferable to put it on a legal footing as opposed to this somewhat vague arrangement. The grandmother would then have to pay capital gains tax on any increase in value when the house is sold. If she then chooses to pass this on to the grand-daughter, I would imagine it would be a PET for tax purposes.

If they both own the property then they should each declare the proportion of the rent equating to their ownership (50/50 unless they are tenants-in-common with a different ratio) and any amounts they pay each other in excess of their rightful share should probably be declared as miscellaneous income by one of them and claimed as an expense by the other, unless it can be treated as a gift, which would probably be within the IHT allowance of £3,000 per annum.

Anyone disagree?

Chris

 

I agree here Chris, great explanation!

But in response to the latest post, why don't you just register the Grand daughter for a SA and get her to deal with it? an additional client for you and the Grandmother has no Tax to worry about bar the little income she'll receive monthly??

Thanks (0)
avatar
By 2156806
09th Nov 2011 13:06

Purchaser

Hi all

To clarify matters - the granddaughter was definetly the purchaser she chose the property and engaged the lawyers to purchase it and the property is registered in her name. The grandmother only provided the funds.

 

Thanks (0)
Replying to Kent accountant:
By cfield
09th Nov 2011 13:18

In that case it should be interest

However, it would be best to have something in writing to prove it, as the rent will tend to vary and the rate will change all the time, and also to show that it is a contractual outgoing, otherwise it may not be deductible against the rent. I'm pretty sure interest does not have to be based on a specific rate so there should be no problems from that angle. The grandmother should consider the effect it may have on her age allowance and declare it as a new source of income by 31 Oct in the next tax year, just to be on the safe side, otherwise she could get clobbered with a penalty, although I don't think you have to tell them about interest. She will probably need to file a tax return though (ask for the short version).

Chris

Thanks (0)
avatar
By WhichTyler
09th Nov 2011 13:42

Quick question

What does it say in the loan agreement? One would hope it says that Grandmother is entitled to charge  an amount of interest 'calculated by  a method to be mutually agreed in writing from time to time' (which would allow for flexibility if granny wants to be kind during void periods or indeed if she wants a fixedamount for security').

And there really should be a loan agreement and insurance, just in case either one of them falls under a bus. One wouldn't want the GD to have to sell the house to meet IHT or other legacies, or for grannies place to be taken by the uncle she has never got on with, etc.

Thanks (0)
avatar
By blok
09th Nov 2011 14:07

.

More Questions than answers I'm afraid!

What does the loan agreement say? 

OK there is no loan agreement, so what is implied by the actions of both parties? 

Without a loan document can it be argued that it's an outright gift?

Is it a condition of the "loan" that the grandaughter buys the property? 

Are there any set repayment date for the loan?  Probably not?

What is the overall objective here? 

There may be other ways to acheive what I think your aims are. 

Is this to avoid care costs?  What is the IHT position of the grandmother? 

Have you considered POAT?

 

Thanks (0)
avatar
By blok
09th Nov 2011 14:09

.

I replied before reading the above post by WT.

Thanks (0)
avatar
By blok
09th Nov 2011 14:11

.

edit: and any of the other posts for that matter.

why does my screen not refresh automatically?

Thanks (0)
avatar
By blok
09th Nov 2011 14:16

.

after reflecting on the other posts, the important question is not really whether it is interest or rent because if it is found not to be a return of the loan capital the result is that it is taxable and not NICable (ok technically we still need the answer) but what is important is what is the intention with the capital and what happens in the event of a disagreement or the GD marries or some other unforseen situation.

It is best to get the intentions in writing and the tax consequences should follow quite easily from there.

Thanks (0)
avatar
By kalonzo
09th Nov 2011 14:28

I have a different view

The grand daughter has bought the house in her name. Note, there is no mention whether there is a mortgage against this. Also the amounts loaned by the grand mother- Its not clear whether there is a clause to repay with or without interest.

Based on the above, in my opinion - as the grand daughter has the house in her name, and she is then sharing the place with her mates and charging rent, this income is accessible on her.

The mere fact that she is then paying this over to the grandmother (net of any expenses) can be treated as miscelleneous income - i am assuming the loan has been lent on a on "non- interest bearing basis".

Thanks (0)
By Marion Hayes
09th Nov 2011 19:21

Neither

I agree with Kalonzo except that in the absence of any legal agreements to the contrary I would say that the payments were return of capital.

Granddaughter is owner and recipient of rental income.

She will be taxable on rents received, but they are likely to fall wthin the rent a room relief method and may well not be high enough to be taxable.

 

Thanks (0)
Share this content