There are a number of situations where an individual may rent out a property at an uncommercial rate, often to a family member or friends. This may be following the inheritance of a property, having purchased a property for capital growth rather than a rental stream or having bought a property for a family member at university for example.
Whilst allowing friends or family to live in a property rent free or at a reduced rent might be seen as a good way to help out, it can create an number of tax issues.
The basic tax position for property rental income is that any excess of income over letting expenses is taxable and should be included on a taxpayer’s self assessment tax return. Should the rental of a property result in a loss for a particular tax year, that loss can be offset against an individuals profits on other rental properties for that year or carried forward to utilise against future property rental profits.
However, if a property is rented out on terms that are not commercial, such as a reduced rent or even for no rent at all, then HM Revenue & Customs (HMRC) can restrict the amount of expenses that can be claimed against the rental income. Whilst HMRC do not have the power to tell a landlord how much rent should be charged for the rental of their property, where the rent is deemed to be less than full market rent then expenses will only be allowed up to the amount of the rent received for that property. The result is that no expenses will be available for deduction if a property is let out rent-free.
Whilst this is likely to mean that no profit arises on such lettings it also has the result that no loss can arise either. This in turn means that no excess expenses can be carried forward for deduction against rental income in future tax years.
Care may therefore be required in the timing of expenses on such uncommercial lettings in order to ensure the deduction of the expenses matches with the rent received and is not ‘lost’ for tax purposes.
The sale of a property let at an uncommercial rent will still be subject to capital gains tax, but lettings relief may be available against the gain if the property was at sometime the taxpayers main residence.
If you would like any advice or assistance in connection with the tax implications of property rental, or alternatively would like to discuss any of the issues above then please contact our Tax Director Jenny Marks.
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