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Renting out property to a family member?

Renting out property to a family member?

I have a situation where someone has been renting out their 2nd property to their daughter.  Are there any special rules for family members, whereby he wouldnt have to pay tax on the profit?

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16th Jun 2014 19:09

I think if the property is let at market value, normal rules for calculating profit and loss on property apply (and tax on profit is due).

However if it is rented below market rate the expenses deducted can not create a loss (PIM2220).

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By JimH
16th Jun 2014 21:16

Agree @Chipette
You absolutely need to pay tax on any share of profit if, with other income, the personal allowance (£10,000 in 2014/15) is exceeded. You can deduct expenses to the extent they don't create a loss.

If not already in self-assessment, the landlords need to do a tax return if rents are more than £10,000 pa or profits more than £2,500 pa.

If parents are married and own property jointly, the rents/profits are split 50:50 (unless a form 17 election has been made for a different % ownership).

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17th Jun 2014 08:20

To answer your question - no there are no special rules that exempt rental income from close family members from tax.  The parent in this case will pay the same amount of tax as if he let the property to a complete stranger paying the same rent.

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17th Jun 2014 09:55

"If not already in self

"If not already in self-assessment, the landlords need to do a tax return if rents are more than £10,000 pa or profits more than £2,500 pa."

This assumes no other income. It is often mis-read and poorly documented by HMRC

If an individuals 'total' income exceeds £10,000 then they need to inform HMRC.

Regards Peter

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17th Jun 2014 12:29

Just in case!

If the daughter receives any form of housing benefit I think that special rules apply when the property is rented from family members.  I think this is to prevent fraud by 'circulating' properties through families and claiming benefit to finance them.

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By JimH
18th Jun 2014 14:43

And if parents have PAYE income ...
... HMRC are likely to try code out estimated rental profits, unless taxpayers ask them not to

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By Joe10
20th Jun 2014 14:43

CGT implications

To take the question one stage further, if the property is rented out to the daughter for little or no rent, when the client sells the property, will letting relief be available?  

If the property is let out for nothing, the rent will never appear on the tax return, so when the disposal appears with an amount for letting relief will HMRC open an investigating?

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By pawncob
20th Jun 2014 16:35

Freebies don't count

Looks like there's got to be some cash involved.

http://www.hmrc.gov.uk/manuals/cgmanual/CG64713.htm 

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By paddy55
21st Jun 2014 00:29

Artificial rent

In Australia, we have the rule that if a property is rented at less than the open-market rent, then only a proportion of the expenses are deductible. For example, assume the open market rent is $1000 per month and the flat is rented at $500 per month to a relative. Then only 50% (i.e. 500/1000) of the expenses can be claimed as a deduction.

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By lisler
21st Jun 2014 22:00

It depends

on whether there is an intention to create a legal intent. There is a long body of case law that examines whether agreements between family members are intended to be legally binding. A court would not try to discover the intention by looking into the minds of the parties. It looks into the situation  in which they were placed and asks "would a reasonable person regard the agreement as intended to be binding." 

There is no clear cut answer one way or another, as some of the answers posted by HMRC apologists assert. If it were so clear cut then a son or daughter making a contribution towards their keep would be taxable as income of their parents. A rather ludicrous outcome I would suggest.

It may well be that the family members would prefer the tenancy to be on a commercial basis and tax payable on the rental profit. For example the tenant may wish to claim housing benefit.

As the first respondent rightly points out if the property is let at below market rent then losses are not allowable, however if the property is let at market rent and losses are incurred then they are allowable. Of course family agreements must be difficult for authorities to prove, if your son, daughter, brother, sister, uncle, aunt, brother or sister wished to gift you money how could HMRC know or prove the intent?

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20th Apr 2016 09:26

Renting property to family members
What is the tax situation if a parent lives with a child where the mortgage is held in the name of the parent and the child pays a contribution to household expenses which covers the mortgage?

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