Offsetting Tax by subleasing

[789789]

Hi,

I am recieving £1500pcm via a rental income. Is it possible to rent the property to my wife and son (student), both of which are unemployed, for a price which will leave me with exactly £0 profit after expenses like mortgage interest, wear & tear etc?

Then they sublet the property out and between the two, after their rental cost to me, and each of thier £5-6k tax-free income entitlement, will also be left with no income tax to pay.

Is that all legal? Will it also mean nor me, or my wife and son will have to file a tax return because obviously no tax will be due?

Thanks :)

[jeffrey]

Hi,

I am recieving £1500pcm via a rental income. Is it possible to rent the property to my wife and son (student), both of which are unemployed, for a price which will leave me with exactly £0 profit after expenses like mortgage interest, wear & tear etc?

Then they sublet the property out and between the two, after their rental cost to me, and each of thier £5-6k tax-free income entitlement, will also be left with no income tax to pay.

Is that all legal? Will it also mean nor me, or my wife and son will have to file a tax return because obviously no tax will be due?

Thanks :)
Be careful with the conveyancing aspects, quite apart from the tax consequences.

[789789]

Could you expand a bit on what you mean? :confused:

[King_Maker]

Easy to do for spouse, but for anybody else a CGT bill could nullify the income tax advantage.

[789789]

This would only be a short term solution until I retire (not long now, 3 or so years! ;)).

So this is perfectly legal and acceptable? To let to my spouse and son, and allow them to sublet? The accounts will also end up with no taxable profits so also no tax return need to be completed?

I assumed this would be perfectly acceptable so am a bit nervous from jeffrey's reply!

[jeffrey]

Could you expand a bit on what you mean? :confused:
Consider carefully what leasehold estate or interest you propose to grant to them. Will they be prohibited from selling/mortgaging it?

[789789]

They will indeed be prohibited from selling/mortgaging. I thought a normal tenancy agreement would be signed between us but it would allow for the house to be sublet during the period of our contract. [Implying my contract with my son and wife]

Is this a legal issue or a trust issue? I have extreme faith in my wife and son and am 100% certain they would never try to do anything with the property.

Could you clear up if the tax issue is legal and feasible? And also that I will no longer have to fill in a tax return nor will they?

Thank you for all your replies, i realy appreciate it :o

[jeffrey]

They will indeed be prohibited from selling/mortgaging. I thought a normal tenancy agreement would be signed between us but it would allow for the house to be sublet during the period of our contract. [Implying my contract with my son and wife]
BUT what sort of tenancy or lease? Not an AST as wife/son will not be resident.

[789789]

I will be honest and say I was under under the assumption I could sign an shorthold tenancy agreement with my son and wife even though they are not residents?

I had read and seen on the internet many times that people are allowed to sublet the house as long as it does not say otherwise in the agreement/with the landlords consent?

[jeffrey]

I will be honest and say I was under under the assumption I could sign an shorthold tenancy agreement with my son and wife even though they are not residents?

I had read and seen on the internet many times that people are allowed to sublet the house as long as it does not say otherwise in the agreement/with the landlords consent?
First paragraph: No. See definition in s.1 of Housing Act 1988.
Second paragraph: Yes.

[789789]

I believe you mean:


the tenant or, as the case may be, at least one of the joint tenants occupies the dwelling-house as his only or principal home;

Never realised that. I believe that would in eye of the law, make any AST contract with my son/wife, invalid? So i would not be exempt from the income tax?

What kind of agreement do I need? Is an oral contract allowing them to sublet the house for a fixed fee not permissible? I really do trust them with everything I have.

Could i also maybe "hire" them? Their jobs would be to collect the money for me. I would get the money which covers the mortage interest, wear and tear etc, and their "fees" would be the rest of the income? Yet again would an oral contract suffice?

I do apologise for my lack of knowledge. This is something I only recently thought about realising my sons and wife's tax free breaks were not being used at all.

Thank you so far jeffery, you've been very kind and patient with me.

[jeffrey]

This depends on tax-effiiciency. A mere oral arrangement is unlikely to convince taxmen! You trust your wife/son, naturally, but as for HMRC...

[789789]

Ahh an oral contract will not be enough to suffice but I cant even sign a document as it wont be valid!

Im considering just writting in my own words on a piece of paper that I am allowing them to sublet the houses and all i ask for in return is my costs towards the house?

I'm also thinking it may be sensible to contact someone regarding this. Never thought allowing them to sublet would be the problem!

But before i go and contact people, am I only a possible path? Is the grounds for what I am thinking regarding the tax possible? It seems its just the implentation of it I need help with.

[jeffrey]

Ahh an oral contract will not be enough to suffice but I cant even sign a document as it wont be valid!
Nonsense. Why can't you use a valid document and sign that?



I'm considering just writting in my own words on a piece of paper that I am allowing them to sublet the houses and all i ask for in return is my costs towards the house.
You are a hopeful soul. Why use a document that's almost doomed to fail (tax-wise, at least) for ineffectiveness? "Writting" is what you'll face.

[789789]

Nonsense. Why can't you use a valid document and sign that?

This is what im having trouble with. Is there a generic standard document I could sign with them like the Assured Tenancy Agreements? Or will I have to get one drafted up?

Also with regard to my comment about other internet articles stating you are allowed to sublet the whole property with the landlords permission, in which cases would that be valid without voiding the original agreement? Surely if someone is subletting the whole property; that is no longer their main house?

Please excuse my spelling ;)

[jeffrey]

This is what im having trouble with. Is there a generic standard document I could sign with them like the Assured Tenancy Agreements? Or will I have to get one drafted up?

Also with regard to my comment about other internet articles stating you are allowed to sublet the whole property with the landlords permission, in which cases would that be valid without voiding the original agreement? Surely if someone is subletting the whole property; that is no longer their main house?

Please excuse my spelling ;)
No, there's no such thing as an all-purpose Deed or document. Each is used for a specific purpose: just as surgeons use scalpels at work but meat or fish knives when eating. As to subletting, one can sublet unless one's L has already prohibited it.

[789789]

Jeffery, I have never been so confused!


When i referred to a generic document, I was implying for example this:
AST Agreement (http://66.102.9.104/search?q=cache:htd98nXSqg0J:www.tenantdocs.co.uk/RlaAst2004Free.pdf+shorthold+tenancy+agreement&hl=en&ct=clnk&cd=2&gl=uk)

I was hoping there may be such a document available for my purposes. My original idea was to find an AST agreement online, and make simple ammendments to allow the tenants (son/wife) to sublet but not allow the sublet tenants to sub-sublet.


As to subletting, one can sublet unless one's L has already prohibited it.

Basically this is what I have heard before, so i assumed an AST agreement with the above conditions would be fine for my purpose?

But you have now told me I cannot rent the property to my wife or son because they are not residents? So when can a resident sublet? What if i were to say they lived there for a day?

Im most likely missing the point completely and your shaking your head with disbelief with my comments, for which i apologise :(

[jeffrey]

JeffREy, I have never been so confused!


When i referred to a generic document, I was implying for example this:
AST Agreement (http://66.102.9.104/search?q=cache:htd98nXSqg0J:www.tenantdocs.co.uk/RlaAst2004Free.pdf+shorthold+tenancy+agreement&hl=en&ct=clnk&cd=2&gl=uk)

I was hoping there may be such a document available for my purposes. My original idea was to find an AST agreement online, and make simple ammendments to allow the tenants (son/wife) to sublet but not allow the sublet tenants to sub-sublet.



Basically this is what I have heard before, so i assumed an AST agreement with the above conditions would be fine for my purpose?

But you have now told me I cannot rent the property to my wife or son because they are not residents? So when can a resident sublet? What if i were to say they lived there for a day?
1. You CAN let to them, whether they are resident or not.
2. You CAN NOT grant them an AST, because they are not resident.
3. So grant them a suitable lease or tenancy whereby they can sublet.

[King_Maker]

If the point of the excercise is to reduce your Income Tax bill via the involvement of family members, it is unlikely to pass close scrutiny by HMRC.

[jeffrey]

If the point of the excercise is to reduce your Income Tax bill via the involvement of family members, it is unlikely to pass close scrutiny by HMRC.
Yes, as I effectively said in post #14. OP should do either:
a. something legally effective; or
b. nothing.

[789789]

Thank you jeffery, I appreciate all the help you have given me.

King_Master, that is why I originally asked this question. If this idea is not legal then I will obviously not bother. But to be honest I cannot see why it wouldnt be accepted.

My son and wife both have £0 incomes, therefore are legally allowed the £6k tax free income each. This will in the end give them £5k each per annum. I cant see where they would have a leg to stand on if they were to dispute this? Please let me know.

With regards to getting them to sign a contract, I will most likely get one drafted up for this purpose via a solicitor. I believe the contract will be legally effective as followed by jefferies #18. Don't worry, I wont be scribbing on a piece of paper and getting them to sign it ;)

Thanks

[King_Maker]

Unfortunately, being legal and being tax effective are two different things - as many "scheme" users have found out to their cost.

[789789]

So is thier any point?
I calculated, as a family we could save quite a lot over this short term and I believed since it was all perfectly legal, it would also be tax effective. Aparently not? :confused:

Are you sure this idea would somehow not be accepted?

[King_Maker]

The hurdle you have to overcome is what is the commercial point of these transactions (saving tax does not count as "commercial" in this context).

You, yourself, would be worse off, as you would make no profit - and your if spouse and/or son were to route the monies (or some form of offset) back to you, then HMRC would definitely see it as a sham.

However, gifting part of the freehold to your wife (and filing Form 17 with HMRC, if the split is not to be 50:50) would be effective in transferring some of the rental profit to her. But any advance agreement for a re-transfer back to you would negate such a scheme.

[789789]

Hmm interesting points you raise.

My intention was that the money from thier rent would be used by my son for his university accomodation, and my wifes half would be used to do the weekly shopping etc. These are both costs I would otherwise directly have to pay for.

However I can clearly see from a commercial point, its ludicrous to rent for no profit.

This is definatly something I will have to bring up with a solicitor and ask if he believes it will be accepted.

Thank you both, something I expected to be fairly simple is turning out to be a lot more complicated and possibly impossible. Will get in touch with a solicitor to find out what he thinks I should do.

Appreciate the help :)