Tax trap when renting to relatives

Uncommercial lets

The saying goes that “no good deed goes unpunished”, and when it comes to tax there are several circumstances that prove it. You might assume that letting a property at a reduced rate would simply reduce your income, but HMRC is always willing to make a bad situation worse. If you let a property at an uncommercial rate, special rules apply which limit your entitlement to tax relief for the expenses.  

Mates’ rates

HMRC’s rules say that where a property is let at less than a commercial rate or isn’t let on commercial terms, the related expenses, e.g. for repairs, building insurance, etc., aren’t incurred “wholly and exclusively” for business purposes. Therefore it assumes there must be another non-business motive. As a result, a proportion of the expenses is not tax deductible. HMRC’s guidance says that where rent is charged, albeit at less than the normal going rate, expenses can be deducted up to the level of rent received. 

Example. Geri lets a property to her brother Christian for £500 per month when the going rate is £800 per month. Geri can deduct all the usual expenses as long as they don’t exceed £6,000 per annum. If Geri has expenses of £3,000, she will pay tax as normal on the rental profits of £3,000. 

Multiple properties

Normally where you let more than one property the income and expenses are pooled to give an overall profit or loss for your property rental business. However, that rule goes out of the window where one or more of the properties is let at less than the market rate.  

Separate your records

When you’re compiling your records you must account for the uncommercial let separately to the rest of your property business. This is to ensure that you don’t receive any relief for losses you make from an uncommercial let. 

Example. Geri from our previous example has  expenses relating to the property of £7,000 for 2024/25, meaning she made a loss of £1,000. She has other properties that are let at the market rent. She makes a profit of £8,000 from them. Geri’s taxable rental profit for 2025/26 is £8,000. She can’t use the £1,000 deficit to reduce profits on her other properties and the £1,000 loss cannot be carried forward to use next year, even against any profits from Christian’s property. 

Shared expenses

Expenses that apply to your properties as a whole, e.g. a flat rate to maintain the gardens at all of your properties, have to be apportioned in a reasonable manner. To make sure you’re not out of pocket it makes sense to set the rent at a level that will cover your known expenses, such as insurance, gas safety certificates and general maintenance. 

It should come as no surprise to learn that if you were so generous as to let a property completely rent free, you can’t claim any losses or obtain any relief for expenses you incur on that property.