Tax issues with charging below market rent to help a relative?

by Readers Question

10:56 AM, 10th September 2013
About 5 years ago

Tax issues with charging below market rent to help a relative?

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Tax issues with charging below market rent to help a relative?

Can anyone think of any potential tax or legal implications with letting out a property at below market rent to help a close relative? Tax issues with charging below market rent to help a relative?

I would of course put it all on a formal basis having no desire for a family relationship to sour due to financial reasons!

A close relative has recently returned after 7 years abroad. They have no credit rating, having left the UK as a young adult and lived in a country with a “closed” currency. In order to help until they have built up a credit rating, I am in a position to purchase a property on a BTL mortgage, and let it to them at a rent equal only to the mortgage payments. They would then be able to save for a deposit with the saving. I have no wish to make a profit from this relative, only to help until they have the 3 years credit rating the bank is asking for. There would be a time limit on the arrangement, which they know, being keen themselves to climb the property ladder.

Are there any legal or tax pitfalls awaiting us?



Comments

Mark Alexander

11:03 AM, 10th September 2013
About 5 years ago

Unless your relative is or becomes your employee I can't think of any tax issues other than CGT on any profits you make when you eventually decide to sell the property.

Do bear in mind that your mortgage will not be your only expense though.

You also need to consider wear and tear, maintenance, insurance, Gas Safety Checks and ground rent/service charges if the property is leasehold.

I would also recommend you to appoint a third party management company just to cover your own back if the relationship between you and your relative breaks down. If you are new to lettings there are several pitfalls which you may not be aware of. You needn't spend a fortune, the level of service you will require can be purchased for as little as £14.99 pcm + VAT and includes everything listed in this article >>> http://www.property118.com/full-property-management-from-just-14-99-a-month/34413/
.

11:22 AM, 10th September 2013
About 5 years ago

Please note that the lender will ask during the mortgage application whether you intend letting the property to a relation/family member. Depending on their lending criteria you may find they may decline the application due to this.

Mark Alexander

11:52 AM, 10th September 2013
About 5 years ago

Reply to the comment left by " " at "10/09/2013 - 11:22":

That's a very good point Samir, the mortgage will be a regulated buy to let which many lenders shy away from. Rather than wasting money on failed application it's best to talk to a fully qualified adviser - see >>> http://www.property118.com/member/?id=314
.

Richard Brown

13:11 PM, 10th September 2013
About 5 years ago

Reply to the comment left by "Mark Alexander" at "10/09/2013 - 11:52":

Another issue with the lenders would be mortgage coverage by the rent - most lenders look for 125% rent / mortgage payment cover (some more or have alternate measures).

Mark Alexander

13:27 PM, 10th September 2013
About 5 years ago

Reply to the comment left by "Richard " at "10/09/2013 - 13:11":

That's less likely to be an issue with a regulated BTL as the mortgage is more likely to be based on personal income.
.

Jay James

13:33 PM, 10th September 2013
About 5 years ago

Based on a conversation with my then tax office over ten years ago (so worth researching now).
IR / HMRC may charge tax on the market rent and not on the rent actually charged.
Memory fails me as to whether they would wish to do this irrespective of having a family member in the property, though I did ask that at the time.
Worth approaching an accountant with relevant experience as well as the tax office.

Mark Alexander

13:44 PM, 10th September 2013
About 5 years ago

Reply to the comment left by "Jay Jay" at "10/09/2013 - 13:33":

I've been in this business for nearly 25 years and was previously an IFA from 1987 to 2009 but I've never heard that.

Nevertheless, if a tax adviser is required, here's a link to the member profile of the chap I use >>> http://www.property118.com/member/?id=452
.

Jay James

13:48 PM, 10th September 2013
About 5 years ago

It would be good to find out the definitive situation, including if tax officers have leeway according to own judgement in this area. If what I said was incorrect, then a tax officer misled me, (not impossible).

Neil Barlow FCCA ATT

15:39 PM, 10th September 2013
About 5 years ago

HM Revenue & Customs Property Income Manual deals with the tax implications of letting a property to a relative either rent free or at less than a commercial rent. The section of the manual to refer to is PIM2220 and advises that where less than a full market rent is charged, expenses may be claimed up to the rent received so that the uncommercially let property produces neither a profit or a loss. The excess expenses that are not claimed cannot be carried forward to be used in a later year. Where there is more than one rental property, these excess expenses are "ring fenced" and may not be claimed against rental profits on other commercially let properties.

I hope that this helps.

Howard Reuben CeMap CeRER

17:55 PM, 10th September 2013
About 5 years ago

Reply to the comment left by " " at "10/09/2013 - 11:22":

Samir, you're absolutely right that there is a difference between BTL mortgages available for 'open market' rent and those for properties which are rented out to family members.

I often end my replies, comments and articles on Property118 by saying that every BTL borrower should work with a whole of market, experienced and 'industry-savvy' Broker and it is probably even more required in this case than most as much time, effort and money could be wasted if a borrower trawls through the market only to be kept being turned down because they don't know the lenders who would say yes to this.

Howard

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