When a family member passes away or moves into full-time residential care, the practicalities of managing their home can be overwhelming. One of the most common solutions we see at Felix Accountants is for families to rent out the property to cover the significant costs of care home fees. Care home rent tax.
There is a widespread misconception that because the money is going directly to a “good cause”—like a nursing home—the income is not taxable. Unfortunately, in the eyes of HMRC, rental income is taxable regardless of how the profit is spent. This article clarifies the tax position for executors and beneficiaries to ensure you don’t inadvertently create a new tax debt while trying to care for a loved one.
1. The “Common Sense” Myth vs. Tax Reality
Many families assume that if the care home fees are £3,000 a month and the rent is £1,500 a month, there is “no profit” and therefore no tax.
The Tax Reality: Care home fees are considered a personal living expense, not a business expense. Just as you cannot deduct your own grocery bill or rent from your salary before paying tax, you cannot deduct care home fees from rental income.
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Example: If you receive £18,000 in rent over a year and have £2,000 in allowable property expenses (insurance, repairs), your taxable profit is £16,000. It does not matter if all £16,000 was paid to a nursing home; you still owe tax on that profit.
2. Who is Responsible for the Tax?
The person or entity responsible for paying the tax depends on the current legal status of the property.
Scenario A: The owner is still alive but in care
If your parent or relative is still the legal owner, the rental income belongs to them.
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The Process: They (or you, via Power of Attorney) must file a Self Assessment tax return in their name.
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The Benefit: They still get their Personal Allowance (£12,571). If their only other income is a small state pension, much of the rental income might fall within their tax-free threshold.
Scenario B: The owner has passed away (The Probate Period)
If the owner has died but the property hasn’t been legally transferred to the beneficiaries yet, the property belongs to the “Deceased’s Estate.”
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The Process: The Executor is responsible for reporting the income.
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The Tax Rate: Estates do not get a Personal Allowance. Rental income is usually taxed at a flat 20% basic rate from the first pound of profit.
Scenario C: You have inherited the property
Once the property is transferred into your name, the income is yours.
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The Process: You must report the income on your own Self Assessment return. The tax rate will depend on your other earnings (20%, 40%, or 45%).
3. The Danger of “Power of Attorney” Errors
We often help clients like “Adam,” who had Power of Attorney for his father. Adam rented out his father’s house to pay for a nursing home and assumed that because he wasn’t personally keeping the money, he didn’t need to tell HMRC.
The Risk: HMRC’s “Connect” system sees the property is being rented. If no tax return is filed, they will eventually issue a “nudge letter.” If the owner is elderly or incapacitated, this can create a stressful legal situation for the family. Using the Let Property Campaign is the safest way to correct these historical oversights.
4. Allowable Expenses: What You Can Deduct
While you cannot deduct the care fees, you can deduct legitimate property costs to lower the tax bill:
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Letting Agent Fees: Management and finders’ fees.
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Maintenance & Repairs: Fixing a leaky roof or broken boiler (but not “improvements” like an extension).
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Property Insurance: Landlord-specific policies.
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Utility Bills: If paid by the landlord during void periods.
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Accountancy Fees: The cost of preparing the rental accounts.
5. Inheritance Tax (IHT) and the “Care Fee Debt”
If the local authority is paying for care via a Deferred Payment Agreement (DPA), they are essentially placing a loan against the house.
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When the person passes away, this “debt” is deducted from the value of the estate before Inheritance Tax is calculated.
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However, the rental income earned while the person was alive remains subject to Income Tax. You cannot offset the IHT debt against the Income Tax bill.
6. How Felix Accountants Can Help
Managing the affairs of a relative in care is emotionally draining. The last thing you need is a dispute with HMRC. We provide:
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Estate Tax Management: We handle the filings for executors during probate.
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LPC Disclosures: If you’ve been renting a relative’s home for years without realizing it was taxable, we can use the Let Property Campaign to settle the history with minimum penalties.
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Power of Attorney Support: we work with Attorneys to ensure the donor’s tax affairs are kept in perfect order.
Frequently Asked Questions (FAQs)
Q1: Is there any “Care Home Relief” for property tax?
No. There is no specific relief in the UK tax code that allows rental income to be tax-free simply because it pays for care.
Q2: What if the property is held in a Life Interest Trust?
In this case, the “Life Tenant” (the person in care) is usually entitled to the income. The trustees are responsible for ensuring the tax is paid, but it is typically taxed at the Life Tenant’s rates.
Q3: Can I split the income with my siblings to use our Personal Allowances?
Only if you all legally own a share of the property. If the property is still in your parent’s name, the income must be reported as theirs. If you have inherited it jointly, the income is split according to your ownership shares.
Q4: We are selling the house to pay the care fees. Do we pay tax on the rent in the meantime?
Yes. Even if you only rent the property for six months while waiting for a sale, that income must be declared if it exceeds the £1,000 allowance.
Q5: Does HMRC find out about inherited properties?
Yes. HMRC receives data from the Probate Office and the Land Registry. If a property changes hands and then appears on a rental site or has a tenant deposit registered, the “Connect” system will flag it.
Compassionate, Expert Tax Support
Dealing with care fees is difficult enough without a surprise tax bill. If you are managing a relative’s property, let Felix Accountants take the tax burden off your shoulders.