Letting a home to a friend or relative for nothing or a discounted rent has different tax rules from normal lettings.
HM Revenue and Customs terms these as uncommercial lets and regards them as tax neutral – which means they always break even and never make a profit or a loss.
Typical uncommercial lets are homes owned by a property investor, but lived in by children or an elderly relative.
Property investors do not have to include uncommercial lets on their tax returns until the home is sold – then capital gains tax kicks in.
The definition of an uncommercial let is a home rented to a tenant for less than the market rate for a comparable property in the neighbourhood.
Because uncommercial lets are tax neutral, three special tax rules apply:
- The owners can only claim expenses, like mortgage interest and repairs, up to the value of the rent received
- Expenses arising from uncommercial lets cannot be set off against rent received from other letting property
- Uncommercial letting costs cannot be carried forward to set off against rentals collected in the following or subsequent tax years
Tax pitfalls to watch for are house sitters and short stays at holiday lets:
Expenses arising from the time house sitters move in between commercial lets are fine – provided the property is available for commercial rental while they are there and you are actively looking for tenants.
No hard and fast rules say how much house sitting time is allowed, but tax inspectors have guidance suggesting this should not add up to more than a month in any three year period.
Uncommercial letting tax rules can apply to holiday lets if friends or relatives stay for free or for discounted rents.
