Letting a property at a discounted rate – what are the tax issues?

Date posted: 7th Mar 2023

It is important that you are aware of the tax issues if you let property at a lower than market rate rent to a friend or family.

For example, it may be the case that a parent will own a property that their adult child uses – this could be a property acquired for the child to live in whilst they are at university but there are other examples.

It is important not to fall foul of special rules where the property is not let on commercial terms or the rents are discounted due to the family relationship.

If this is the case, then not all of the expenditure associated with the property can be offset – particularly where the expenditure exceeds the rental income and creates a loss. This is because HMRC will be able to argue that the expenses incurred are not wholly and exclusively incurred for business purposes. However, if the expenditure exceeds the rental income, HMRC will accept a claim for the allowable expenditure up to the level of the rental income, so that the result produced is neither a profit nor a loss. Any expenditure incurred above the rental income is lost and cannot be claimed. In addition, since the change to the tax relief for mortgage interest, it is important to remember that this is not an expense of the rental business. So you could still end up with a tax charge as there may be a profit if you ignore the mortgage interest.  There may be some relief for the mortgage interest incurred but if the profit is taxed at higher rates, the mortgage interest relief is only ever given at basic rate.

Even if there is a no profit / no loss scenario, it is important to make sure that you are not carrying an “unallowable” loss forward against future rental income or even offsetting the “unallowable” loss against other rental income if you own other properties from which you receive rental income.

A similar restriction may arise where an individual owns a furnished holiday let or caravan which is available to let to the public, but they also allow friends and family let the property at discounted rates.

As ever, we are here to help with all property tax matters.

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