My father-in-law is wanting to live the remainder of his life in a nice bungalow near our family. I've agreed, in principle, to be his landlord.

Let us work with the following numbers:

  • House price of £150k, with a deposit of £60k
  • Father-in-law is 78. When he passes away, we want to retain ownership of the house without excessive inheritance tax, and then rent it to a new tenant
  • Monthly payments will be that my father-in-law pays for the bills and half the mortgage as rent (approx. £300 pm) and my partner and I pay the other half of the mortgage (£300)

Now if I have a buy-to-let mortgage, then I have to contend with higher costs (higher interest rate, higher tax contribution, landlord insurance etc.)

On the other hand, I could have a gentleman's agreement whereby the monthly payments are gifts, which avoids taxes but has the potential to cause a lot of problems if there are any disputes.

My question is, what type of mortgage is 'best' in this case? By 'best', I mean tax and cost efficient whilst setting up the property for future rental potential.

  • Are you or your partner a higher-rate taxpayer or would the rent push you into the higher-rate tax bracket? It affects the economics because mortgage interest on rented-out properties is only deductible at basic rate. Also you said "Your father-in-law pays half the rent and you pay the other half of the mortgage", did you mean that he should pay half the mortgage as rent and you would pay the other half? – GS - Apologise to Monica Jul 7 '19 at 9:55
  • @GaneshSittampalam I would become a higher rate tax payer with the rental income. Re: father-in-law pays rent, then yes, I meant that he pays half the mortgage as rent and I pay the other half. – Bad_Bishop Jul 7 '19 at 11:12
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    Is there a case for creating a company to own the property? Since the government initiated its "war on BTL" I occasionally see articles claiming that these days landlords are better off owning a company that owns the property. No idea about practicalities or whether it makes sense for single properties. – timday Jul 7 '19 at 13:26
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    If you are buying the house, how is "When he passes away, we want to retain ownership of the house without excessive inheritance tax" relevant, since there won't be a house for you to inherit? – RonJohn Jul 7 '19 at 15:19
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    Note that, because you (or specifically, your partner) is proposing to rent to an immediate family member, you may need a regulated BTL mortgage, as the more common unregulated kind cannot be used in these circumstances. Regulated BTL mortgages tend to have higher interest rates. – Steve Melnikoff Jul 7 '19 at 20:06

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