Our stepmum, 84, is in a £2k per week nursing residence… can we hire her vacant property to place in the direction of the invoice?

My stepmother is in a nursing home costing £2,000 per week. She has been paying this since August 2023. She has approximately three years’ cover ahead from cash assets.

Her property has been vacant from August 2023 and we are looking to let it at £1,600 per month which would go into her account. We would intend to do a tax return as she is already a 40 per cent taxpayer from pensions income.

A key driver not to sell is to retain potential property value escalation (better than cash Isas) and lower outgoings on her bank account such as council tax and insurance.

Will this action do anything that can affect Principal Private Residence Relief when we have to sell in say two years’ time or indeed IHT relief in the future?

The house is in her sole name and worth around £600,000. I have a financial power of attorney. 

She is 84 and not in good health but could still have many years ahead and may need all this money to finance nursing costs. I.H, via email

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Harvey Dorset, of This is Money, replies: How to fund the cost of later life care is a conundrum many of us will face at some point in our lives, whether for a parent or relative – or for care we need ourselves.

It can be worrying to see the value of assets decline as care fees eat into them – especially when homes are sold in order to fund these costs.

To find out what you need to weigh up to establish whether renting the property is the right decision for you, This is Money spoke to two financial advisers.

Natalie Donnell, independent financial adviser at Flying Colours, replies: It’s good to see that you are thinking of the best way to ensure your stepmother continues to be well cared for

It sounds like you are already using a combination of pension income and top ups from cash savings to fund your stepmother’s care. 

You are also giving consideration to renting out the main residence to make the funds last longer and also to benefit from any uplift in house prices.

This is by no means a bad idea. 

It can be advantageous to rent out the main residence and make the property work for you by delivering a rental income stream and reducing the monthly costs – as the tenant will pay the utilities and council tax bills, whilst benefiting from any increase in the value of the property.

However, you need to be conscious of the potential disadvantages too. There may be periods where there is no tenant and therefore no rental income, therefore, you might experience maintenance and/or tenant troubles, as well as potential costs for maintenance work.

Another consideration is managing the property to ensure it is always up to date when meeting strict safety rules. 

Your responsibilities as a landlord also need consideration- do you have the time or inclination to speak to tenants, carry out maintenance jobs and deal with lettings agencies? 

It is worth knowing that some lettings agencies will manage a property for you, albeit at a cost, if this is an issue.

In terms of your responsibility as a landlord you must:

• Keep the rented property safe and free from health hazards;

• Make sure all gas equipment and electrical equipment is safely installed and maintained;

• Provide an Energy Performance Certificate for the property;

• Protect your tenant’s deposit in a government-approved scheme;

• Check your tenant has the right to rent your property, if it’s in England; and

• Give or email your tenant a copy of the ‘how to rent’ checklist when they start renting from you.

As far as private residence relief is concerned, letting out a property for more than three years could restrict this relief for the periods that your stepmother did not live in the property. 

This could give rise to a capital gains tax (CGT) liability if you sold the property during your stepmothers’ lifetime, as it would no longer be considered as a primary residence during this period, however, the estate would not pay capital gains tax on the property if it were not sold before death.

However, renting out the property will not impact the inheritance tax (IHT) liability, as both a main residence and rental properties fall within the estate for inheritance tax purposes.

Renting out the main residence will not impact on the eligibility of the Residence Nil Rate Band either. It is available to those who owned or part-owned a property that was their residence at some point during their lifetime.

If you rent a £600,000 property out for £1,600 per month, this equates to a 3.2 per cent rental income yield, before you consider reductions for tax implications and additional ongoing costs for maintenance.

It would be worth considering whether this is the most suitable option for your circumstances, or if you could achieve similar or higher returns without the headache and cost of landlord responsibilities.

If you are concerned about sustaining the funds whilst financing the care costs, you might want to consider a guaranteed income option to cover the shortfall.

This would be done with an immediate needs annuity; an insurance policy which will provide a guaranteed income for the rest of your stepmothers’ life, in return for a one-off premium, to contribute towards the cost of care. 

The level of the premium depends on factors such as the person’s age, health, the current level of the shortfall and the expected increases in the cost of care.

This option could provide peace of mind, knowing that the care costs will be covered for the rest of your stepmother’s life, whilst capping the cost of care, taking no investment risk and safeguarding their remaining capital.

Furthermore, if the benefit is paid directly to a registered care provider, the income is tax free and will not affect any other tax allowances.

However, be aware that the purchase of an annuity will remove the equivalent value of the initial premium from the value of your stepmother’s estate. Even so, this could prove an effective inheritance tax mitigation strategy too.

This can be a complex area of financial planning, and it is strongly recommended that you seek professional advice to consider the most appropriate strategy to fund the care costs, based on your personal circumstances.

Jonathan Halberda, chartered financial planner at Wesleyan Financial Services, replies: This is a complex area and holding power of attorney means that you are in a position of great responsibility. Let’s look at each of the issues you raise in turn.

Income Tax

You will have to file a self-assessment tax return, called a Declaration of Rental Income, every year to declare this income.

As your stepmother is already a higher rate taxpayer, the £1,600 per month rent will be added to her taxable income and taxed at 40 per cent, or around £640 per month.

However, expenses such as letting agent fees, insurance and maintenance may be deductible, so it will be important to ensure accurate records of any costs you incur.

As you note, letting the property could also reduce expenses such as council tax (assuming the tenant pays) and insurance, as some providers charge higher rates for vacant properties.

However, you must still ensure you have adequate insurance for a let property and comply with all landlord responsibilities.

Principal Private Residence relief

Principal Private Residence relief means that you do not pay capital gains tax when you sell your home if you have lived in it for all the time you’ve owned it

However, given that the property has been vacant while your stepmother has been living in a nursing home and that it will now be let to tenants, this creates a period of non-occupation, which could reduce the level of relief.

And when the property is sold, a portion of the gain made during the letting period may be eligible for capital gains tax at the higher rate of 28 per cent, subject to reliefs.

Inheritance Tax (IHT)

The property, valued at £600,000, will form part of your stepmother’s estate for IHT purposes.

Renting it does not directly affect the IHT calculation, but it could increase the size of her taxable estate if rental income accumulates.

If care home costs deplete her estate below the nil-rate band of £325,000 – below which IHT is not payable – there may be a reduced IHT liability.

And if the property is passed down to a direct descendent, £175,000 of its value can be protected from IHT through the residence nil-rate band.

Otherwise, the estate will face 40 per cent IHT on amounts exceeding these thresholds.

Care costs

Your local authority may include the property in its financial assessments for care costs if your stepmother depletes her liquid assets, though renting the property might delay this point.

You mention that you ultimately plan to sell the property, which may make financial planning simpler, but could also mean the proceeds are depleted by care costs and reduce the potential for capital appreciation.

The proceeds could also be invested, for example in low-risk income-generating funds, but it will be important to compare any potential returns against the expected capital appreciation of the property.

It will be important to monitor the market in case property prices decline or care costs increase, which should prompt you to re-evaluate the decision to hold the property.

Seeking advice

Whatever you decide, as you hold financial power of attorney over your stepmother’s estate, you are obligated to act in her best interests.

It’s advisable to document the rationale behind the decision to let the property, which could include preserving capital and generating income, should any decisions be scrutinised later.

In any case, this is a complex area, and you should certainly consult a tax advisor or accountant regarding the capital gains tax implications.

At the same time, a financial advisor will be able to optimise estate planning for IHT, which may include making gifts or setting up trusts.