HMRC's uncommercial let rule — below-market rent and loss relief
- ITA 2007 s.127 — uncommercial let: where a property is let at below open market rent, any loss arising from that letting cannot be set off against other UK property income or any other income; the loss is ring-fenced and can only be carried forward against future profits from the same letting
- Expenses limited to actual rent received: where rent is below market, expenses can only be deducted against actual rental income received — a landlord who receives £500/month actual rent but has £800/month of allowable expenses cannot deduct the excess
- What is below market rent: HMRC assesses whether the rent is below the amount a willing unconnected tenant would pay; a nominal discount (10-15%) with a genuine commercial reason may not trigger the uncommercial let rule — a nominal rent of £1/week clearly does
- Section 24 mortgage interest restriction: the 20% tax credit on mortgage finance costs applies to family lettings — but where actual rent is below market and losses are ring-fenced, the practical benefit may be very limited
- Rent-free letting: where a property is let entirely rent-free, HMRC may treat this as not a commercial letting at all — no expenses or mortgage interest credits are available
Losses from uncommercial lets cannot offset other rental income
A landlord with a portfolio of commercial lettings who also lets to a family member at below-market rent cannot use the losses from the family letting to reduce the tax on the other properties. The uncommercial let loss is ring-fenced under ITA 2007 s.127.
Inheritance tax — gift with reservation of benefit
- IHTA 1984 s.102 — gift with reservation: where a person gifts property but continues to receive a benefit from it, the gift is a gift with reservation; the property is not treated as leaving the donor's estate and remains in the estate at death at its then market value
- Classic family scenario — parent to child: a parent who transfers a property to their adult child but continues to live in it (or derives other benefits) has made a gift with reservation; the property is fully within the parent's estate on death
- Pre-owned asset tax (POAT): for arrangements where GWR does not strictly apply but the landlord-donor derives an indirect benefit, the pre-owned assets income tax charge (Finance Act 2004 Schedule 15) may impose an annual income tax charge on the notional rent of the property
- Seven-year rule for outright gifts: an outright gift with no reservation of benefit is a potentially exempt transfer (PET) — IHT-free if the donor survives seven years; taper relief applies between three and seven years
CGT — connected persons and market value rule
- TCGA 1992 s.18 — connected persons market value: a disposal to a connected person is treated as made at open market value for CGT purposes regardless of actual consideration; a parent who gifts a property to a child triggers a CGT disposal as if sold at market value on the gift date
- Who is connected (TCGA 1992 s.286): spouses and civil partners; lineal descendants (children, grandchildren) and their spouses; siblings and their spouses; parents and grandparents; business partners
- No s.58 no-gain-no-loss relief: the no-gain-no-loss disposal between spouses/civil partners (TCGA 1992 s.58) applies only to spouses and civil partners — not to other family members
- Holdover relief not available: gift holdover relief (s.260 TCGA) is available for business assets but NOT for residential investment property — the CGT gain crystallises on the gift date
- PRR interaction: where the property was the landlord's main residence, private residence relief may reduce the chargeable gain for the period of actual residence plus the final 9 months of ownership
Legal requirements — right to rent, AST, and HMO licensing
- Right-to-rent checks: the Immigration Act 2014 obligation applies equally where the tenant is a family member — the landlord must check and document the right to rent of all adult occupiers before the tenancy begins; penalty up to £5,000 for first breach
- AST or excluded licence: where the family member has exclusive possession of the property (landlord does not live there), the tenancy is governed by the Housing Act 1988 as an AST — all AST obligations apply including deposit protection, prescribed information, How to Rent guide, gas safety, EPC, and EICR
- Excluded licence: where the family member lives with the landlord and does not have exclusive possession of the whole property, the arrangement may be an excluded licence outside the 1988 Act — fewer statutory protections apply
- HMO licensing: where a property is let to two or more family members who form more than one household (for example, adult children from different relationships), mandatory HMO licensing may apply