My Mother, who is 83 years old, owns a house in Devon. The property is
worth about 300,000 pounds.  The house is split into two flats; my
Mother and my sister live in the lower flat, and a tenant lived in the
upper flat.  The tenant, who had been paying 65 pounds per week in
rent, just died after living there for 16 years.  Now the flat
requires substantial repairs.  My mother needs to borrow the money to
make the repairs.

When the repairs are complete, my mother believes she cannot ask for
more than 65 pounds per week rent from the new tenant, because she
believes she will lose the present government support she receives.
She gets a pension, plus a ?top up? pension, as she did not contribute
enough in ?stamp? income during her life. She has no significant
assets outside of her house. We are also wondering what kind of
"sitting tenant" rights may exist in UK that may harm us when we
eventually rent the flat, and how to avoid having a renter that can
stay forever at the same rent.

We would like to know how my mother can charge more rent and keep her
pension, as well how to get the best loan for the improvements to the
property that can eventually be repaid out of the proceeds of the
house sale when she dies.

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Clarification of Question by james1352-ga on 20 Aug 2005 09:30 PDT

FOR FRDE-GA
Thank you for commenting. I believe that with a lttle more work, I
would be happy to pay you the fee, as you nearly answered all of the
question.
My mother is most concerend she will lose government benefit, penny
for penny, if she charges more rent.  Borrowing the money is not much
of a problem (except psychologically- she has never borrowed any money
in her life).
So the real question is about benefits, and how she can raise the rent
without losing government benefit. Please let me know if you would
like to tackle the rest of this question.  James Clelland

GBP 260 per month is not exactly a high rent.

You can get round the 'sitting tenant' problem quite easily nowadays.
One method is renting it as furnished
- another is to have fixed term agreements, which you periodically renew.
- yet another is to claim that one needs to move in oneself.

I've a suspicion that the GBP 65 thing is something to do with the tax
free 'rent a room allowance', in which case, the tenant has no tenure.

It strikes me that you are in for a bit of inheritance tax, the tax
free limit is around GBP 275k so one might as well borrow as it
reduces the estate
- 40% of (say) 25k is destined for Gordon.

Ideally some sort of interest only loan, preferrably with a cap, but
I've a suspicion that few reputable lenders will be interested in such
a small sum.

Somehow, I think that the best bet is for you to come up with a
creative deal, that is fair to your mother and does not put too much
strain on you.

Dear James,

I needed to return recently to my tenanted property in Somerset, and I
wish to advise you to be very, very careful:

Firstly, you need to write up the AGREEMENT of an "Assured Shorthold
Tenancy under Part I of the Housing Act 1988 as amended under Part III
of the Housing Act 1996".  I would advise you to use a solicitor for
this - it is bog-standard stuff.  Otherwise, a good up-to-date law
book from the local library will give you a atandardised layout. By
law, this has to be for a minimum of 6 months, with the option of
extending.  There is space for you to fill in the rent.  It is best to
sign a new AGREEMENT if you are going to change the rent, otherwise
ensure that there is a clause in the original which allows you to
increase it either at a set date or after, say, one year.

I have to say that frde-ga is mistaken when he/she says that you can
get around the sitting-tenant problem by having the flat furnished.  I
had a long, drawn-out business because - and I warn you - the tenant
was on Housing Benefit and was legitimately  told by the local Council
Housing Dept that she should stay put until I evicted her (£120 at the
County Court).  Apparently, anyone on Housing Benefits must be evicted
otherwise they have "made themselves homeless" and the Council is not
obliged to help.

Despite the tenant having had months and months of forewarning that I
needed to return to my house after working away, once she received the
Eviction Order, she then demanded (legally) that she stay on for the
maximum of 42 days. Then she did not leave quietly and waited for the
bailiff to turn up.

So, my advise is . . . ensure your tenant has a good reliable job!

I do not know about your mother's benefits, but it would be worth
asking for clarification from her Benefits Office (also, the Citizen's
Advice Bureaux are excellent at this - you may need to make an
appointment).

Good Luck, but please be careful.

James,
First, only Google-Answers Researchers, whose names appear in blue,
can "answer" a question and be paid (which happens automatically,
unless the questioner asks G-A for a refund).  So, we black-name
commenters are just trying to help, and may give contrary suggestions.
 And  - of course - none of this is professional or legel advice, see
the disclaimer below.

Since Frde-ga has raised the point of inheritance tax, I agree with
his idea of reducing the net estate with a loan, maybe one bigger than
needed for the renovation if that eliminated inheritance tax (I don't
know how real estate is valued in England for that).  It would seem
that your mother could only get a loan with co-signature by you or
your sister, but the mortgage loan needs to be in your mother's name,
of course, to be included in the inheritance.
Then  - in my plan, which is getting a little personal -  she could
give the house and loan to whomever would inherit it, thus removing
the problem of increased rent upsetting her government support  - if
that is indeed a problem.
Of course, I am assuming that "whomever" would assure that your mother
had enough to live well on.  The gift could be documented with a
lifetime right of occupancy and compensation for the lost rental
income  (but not more, or that could also upset the support).
If the house would be left to both you and your sister, does that
remove the risk of inheritance tax?  (Just a thought, don't reply.)

This is a little tricky, and I do not know if it is at all possible in
England.  My German tax law doesn't like transactions that only are
done to avoid taxes, and in the UK, it might well be the same.
I seem to remember that Frde-ga (Hi!) is closer to accounting matters
on your side of the Channel.
IF he or someone else doesn't immediately shoot down this idea, you
need to ask a solicitor with tax knowledge.

Well meant, but may well of target, Myoarin

Hi, as pointed out, I'm not a researcher.

Also martinesmith may well have a point about social security tenants.
- that rings a bell

If you do decide to use a solicitor, then I strongly recommend that
you negotiate a fixed rate.

Normally such things would be handled by a letting agent, since their
fees would come 'off the top' the effect would be neutral.

Another alternative would be to buy a book (manual) on the subject,
the ones I've used for other areas are very comprehensive. Actually it
would be a good idea to look out for one regardless.

I've just done a search for:    | "Rent A Room" tax free income UK  |
Pages from the UK only 
- possibly this is the scheme that your mother is thinking about, in
which case (ahem) she might be a borderline case.

The second link is :
http://www.direct.gov.uk/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/TaxOnRentalIncomeArticles/fs/en?CONTENT_ID=4017804&chk=mGasop

myoarin has some good points, but one needs to be aware of capital
transfer (I believe it is all wrapped up in IHT nowadays) basically it
must be a 'gift without reservation' and the IHT relief tapers in over
7 years.

There are certain cases where it is unwise to rock the boat ...