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Kirk Rice Blog

Renting Property To Family – Will This Create Tax Issues?Written on January 9, 2019 by Kirk Rice LLP

Renting Property To Family  – Will This Create Tax Issues?

I have 3 investment properties that I rent out. One of the properties is about to become vacant and I would like to rent it to my son for 12 months at a reduced rent. Are there any tax implications to renting property to family?

In any business undertaking, be it a trading concern or a property letting business such as yours, there is a basic requirement that for expenses to be deductible from income, the expenses must be incurred wholly and exclusively for the purposes of the business. The need for expenses to satisfy the wholly and exclusively rule operates to deny relief for properties that are not let at a commercial rent.

HMRC take the view that unless the landlord charges a full market rent for a property and imposes normal market lease conditions, it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes. Where a property is let at a rent that is less than the commercial rate or the property is occupied rent-free, for example by a relative or charity, the assumption by HMRC is that the expenses are incurred for a personal or philanthropic reason (for example, providing the occupant with a home) rather than for a business purpose. This has implications for the deductibility of those expenses.

Taking a strict approach, expenses that are not incurred wholly and exclusively for the purposes of the business are not deductible in computing the profits of that business. However, HMRC do not take that harsh a line and where a property is let at a rate that is less than the market rate they permit expenses to be deducted up to the value of the rent. This means that the expenses cannot create a loss and excess expenses cannot be carried forward to be used in later years, or set against the income from other properties in the rental business. If expenses exceed the rent for a property that is not commercially let, the result is that the property produces neither a profit nor a loss. No relief is given for the excess expenses.

Given that you have 3 properties, it will be important to separately list the expenses for the property let to your son and if the total of those expenses exceed the rent you receive, to only claim up to the amount of the rent received.

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If you would like more advice regarding renting property to family members any other tax matter, please email info@kirkrice.co.uk and one of our Tax Partners will get in touch.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The FCA does not regulate tax and trust advice.

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