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Thread: Renting at below market rate - implications?

  1. #1
    Master M1011's Avatar
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    Renting at below market rate - implications?

    Bit of a random one for a watch forum, but lots of experience on here so thought I’d ask if anyone knows the implications of renting out a property at a favourable cost to a close family member?

    Considering the option of keeping my current house when we move on soon, to rent to a very close family member (at cost). Advantage being we keep the property (potential value appreciation), stress free arrangement, keeps money in the family and we’d save the family member a sizeable chunk on their current rent too.

    Are we free to simply charge well under market rate and crack on? Is there any difference at all when providing property to a family member? Is there a better way to do it other than a rental arrangement?

    I will of course discuss with a pro before making any financial decisions, super early in the thinking and just trying to gauge the option so any nuggets of wisdom are much appreciated. Thanks!

  2. #2
    Master
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    As long as you do it all by the book,charge what you like (I.e. have a proper contract, even with family!)
    I've a few lucky mates paying well under market rate because they've been in a while and landlords know they are great tenants. Must be more desirable than milking every penny and getting nutters in.

  3. #3
    Master blackal's Avatar
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    I am sure it has to be a ‘representative’ rate, no matter who you rent to.

    If do rent at a ‘favourable’ rate - have a list of mitigating reasons to hand.

    perhaps something about response times to appliance failures or plumbing issues?

    Just make it ‘plausible”

  4. #4
    Grand Master number2's Avatar
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    Quote Originally Posted by kevkojak View Post
    As long as you do it all by the book,charge what you like (I.e. have a proper contract, even with family!)
    I've a few lucky mates paying well under market rate because they've been in a while and landlords know they are great tenants. Must be more desirable than milking every penny and getting nutters in.
    Current market rates have gone crazy, 80%ish of ours are below current market, but the tenants have been with us some time, they carry out minor issues themselves and maintain the houses in good order, all the local landlords I know prefer stable tenants and are prepared to ''cut their cloth accordingly''.
    "Once is happenstance. Twice is coincidence. The third time it's enemy action."

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  5. #5
    Master
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    You can charge what you like - just make sure you do a proper tenancy agreement which will cover yourself and the tenants.

    Also if you have a mortgage on the property or switch it to a buy to let, The lender may not officially allow you to rent to family.

    I have rentals and they are all quite a bit under what I could get now, but I’m happy with that.

    You may well have CGT in the future so bare that in mind.

  6. #6
    Craftsman
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    I would certainly think carefully when renting out a home to a family member or close friend, we’ve done it before and I wouldn’t want to do it again!

    Personally I can’t see any implications with renting out at a lower price, I’m guessing you won’t have a buy to let mortgage so no potential issues with tax returns being too low for borrowing.

    Word of caution - our friends recently rented out their house whilst they rented in London and didn’t declare any tax (how could we get caught they thought), well HMRC found their name against the DPS (Deposit Protection Service) as a landlord and they’ve ended up with a huge tax bill.


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  7. #7
    Master SeanST150's Avatar
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    I'm really no expert, but I looked at doing something similar, the tax implications put me off I think you have to declare the rent as income? And the rent is taxed at your current tax rate, which means you can't rent it at cost?

  8. #8
    Journeyman
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    I'd certainly make sure you get a proper AST (assured shorthold tenancy) agreement signed. Also, bear in mind that 'section 21' is due to be shelved at some point. In a nutshell section 21 allows a landlord to evict a tenant for no stated reason. Once this ends landlords will have to use 'section 8' to evict, which requires a stated reason e.g. non payment of rent.

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  10. #10
    Also I think you’ll need to convert the property to a Btl mortgage which will mean you will incur additional level stamp duty either when purchasing your current house via SPV or if you keep it in sole ownership when you purchase your new house you’ll pay high love stamp duty. You can claim the additional back if you sell in the following 3 years I think.

    This is with out factoring the tax costs either via self assessment or ltd company on the rental income.

    I think tax wise a ltd company is more efficient but incurs higher rate of stamp being paid on conversion to btl plus rates are high right now. The flip side being you can count the Stamp as part of the asset cost and then only pay CGT on profit on disposal.

    Self assessment is higher tax wise as the interest relief has been tapered down to 0 with a flat 20% relief, in addition the 10% wear and tear allowance has gone. Then there is CGT at the time of disposal which may eat in to the additional stamp relief.
    Last edited by j17ykp; 7th September 2022 at 19:48.

  11. #11
    Grand Master Onelasttime's Avatar
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    Quote Originally Posted by number2 View Post
    80%ish of ours are below current market, but the tenants have been with us some time, they carry out minor issues themselves and maintain the houses in good order
    Quote Originally Posted by Devonian View Post
    I have rentals and they are all quite a bit under what I could get now, but I’m happy with that.

    My heroes. Latter day saints. Men of the people.

    To own all those properties and allow the peasants to feather your nests at below market rates? We are truly humbled

  12. #12
    Master M1011's Avatar
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    Thank you for all the replies. Super helpful and has immediately spotlighted a bunch of challenges that will most likely make this a no-go for me.

    In terms of rent, I hadn’t appreciated we’d be paying 40% income tax on it which largely erodes the benefit we had hoped to pass on to the family member. I’d expected to pay tax, but rather naively hadn’t realised it stacked on top of employment income.

    I also hadn’t considered the impact of increased stamp duty for the next home or the impact on CGT relief on sale of the current home in the future. It also stands out that these costs would be incurred even if we let the family member stay in the home for free with no rent charged.

    The renting to family concern that has been rightly raised wouldn’t personally be any issue for me in this case, but solid advise in general I would agree.

    On balance given the impact of income tax, CGT and stamp duty, I just don’t see it stacking up unfortunately.

    Thanks again for the helpful replies.

  13. #13
    You pay tax on the net income not the headline rent figure, including (I think) a 20% credit on mortgage interest, so you should be able get this to work. Shouldn't be out of pocket at then end of the exercise.



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  14. #14
    Quote Originally Posted by xxnick1975 View Post
    You pay tax on the net income not the headline rent figure, including (I think) a 20% credit on mortgage interest, so you should be able get this to work. Shouldn't be out of pocket at then end of the exercise.



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    I think it’s income tax rate on net income excluding mortgage interest.

    You get 20% relief on mortgage interest but if your a 40% payer you’ll still pay marginal difference.

  15. #15
    You may not need a BTL mortgage from your provider, ask them about a 'consent to lease'. When for personal reasons i had to move in with my partner and rent out my flat I was surprised that I didn't need a BTL product. I have been on the consent to lease for around 10 years! It will depend on LTV and rental returns though. I fill in a form once a year to confirm that the situation hasn't changed but other than that the mortgage company has been fine, I am on their not great SVR which is of course rapidly increasing so will explore other options at some point.

  16. #16
    Usual advice is to never mix business and family, recipe for disaster.

    But if you're set on the idea, make sure you do it all by the book

    Tenancy agreement
    Take a deposit and register it in a DPS
    Apply for consent to let if property is mortgaged, if they say no, you'll have to remortgage to a BTL
    Smoke alarms, at least 1 per floor
    Carbon monoxide alarms, in every room which contains a fixed combustion appliance except cookers, so boilers, fireplaces etc
    Gas safety certificate
    Electrical Installation Condition Report (EICR)
    Energy performance certificates (EPC)
    Tell the tax man

    You'll owe tax at your current rate on the rent minus any expenses (insurance, maintenance etc) minus 20% of your mortgage interest (just the interest, not your full monthly payment)
    You'll also have to pay an extra 3% stamp duty on the full price of the new place

  17. #17
    Master M1011's Avatar
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    Thanks again for the continued useful info

    Quote Originally Posted by Brighty View Post
    Usual advice is to never mix business and family, recipe for disaster.

    But if you're set on the idea, make sure you do it all by the book

    Tenancy agreement
    Take a deposit and register it in a DPS
    Apply for consent to let if property is mortgaged, if they say no, you'll have to remortgage to a BTL
    Smoke alarms, at least 1 per floor
    Carbon monoxide alarms, in every room which contains a fixed combustion appliance except cookers, so boilers, fireplaces etc
    Gas safety certificate
    Electrical Installation Condition Report (EICR)
    Energy performance certificates (EPC)
    Tell the tax man

    You'll owe tax at your current rate on the rent minus any expenses (insurance, maintenance etc) minus 20% of your mortgage interest (just the interest, not your full monthly payment)
    You'll also have to pay an extra 3% stamp duty on the full price of the new place
    Thanks, that’s a good list.

    While I never intended to become a landlord, I did quite like the idea of hanging on to my first house. Less pressure on buying, less wasted cash on selling agent fees and sunk costs on stamp duty, a bit of long term security (considered paying off the mortgage on it entirely) etc. Plus the family element made it risk-free and I thought a good way to pass on substantial benefit, and while I understand the general guidance on the family point in this case it really would be of no concern. But I think I’ve now completely gone off the idea to be honest as the tax, CGT and stamp duty implications are a bit too much.

    Half makes me wonder why buying-to-let is so popular, but thats probably just my risk adverse nature when it comes to money. I guess property price appreciation is a big part of the attraction.

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  19. #19
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    Quote Originally Posted by SeanST150 View Post
    I'm really no expert, but I looked at doing something similar, the tax implications put me off I think you have to declare the rent as income? And the rent is taxed at your current tax rate, which means you can't rent it at cost?
    Think you might be referring to the restriction of tax relief for finance charges (interest, etc.) to basic rate. So £1,000 rent and £1,000 interest = no commercial profit but Higher Rate taxpayer would be paying 40% on the rent but only getting 20% relief.

  20. #20
    Master SeanST150's Avatar
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    Quote Originally Posted by David_D View Post
    Think you might be referring to the restriction of tax relief for finance charges (interest, etc.) to basic rate. So £1,000 rent and £1,000 interest = no commercial profit but Higher Rate taxpayer would be paying 40% on the rent but only getting 20% relief.
    I was being very basic in my calculation to see if it was a starter. I was paying most attention to the highlighted sentence, taken from the Government's website.

    If you are a higher rate tax payer, I assumed if the mortgage payment was £600, you'd need to charge rent of at least £1,000.

    I appreciate there are allowances for the interest element of the mortgage, and allowances for property related costs, but a quick and dirty was leading me to think I'd need to charge rent of at least twice the mortgage payment to break even. This is on a capital and repayment mortgage, I hadn't thought of/looked at interest only.

    The days of being able to generate a monthly income from a BTL are long gone, and I'm overall happy this is the case for the wider housing market/those needing to get on the ladder. Renting out a second (or more) property is certainly a long term investment now, where your profit comes from any profit on disposal (less taxes).

  21. #21
    Master
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    Quote Originally Posted by SeanST150 View Post
    I appreciate there are allowances for the interest element of the mortgage, and allowances for property related costs, but a quick and dirty was leading me to think I'd need to charge rent of at least twice the mortgage payment to break even. This is on a capital and repayment mortgage, I hadn't thought of/looked at interest only.
    I very much doubt that many people have made a recurring “significant” profit as well as servicing the capital repayments on a mortgage. I don’t know what the national average rental yield is but a 100% mortgage over 25 years means you have to pay 4% every year to pay off the mortgage. As you note, the capital repayment element is basically the cost of the asset/investment so not tax deductible. (In the early years, most of the payments on a capital and interest mortgage are interest. Most capital is paid off in later years.) And that 4% doesn’t include interest let alone other costs.
    Last edited by David_D; 9th September 2022 at 20:55.

  22. #22
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    Quote Originally Posted by M1011 View Post
    Thank you for all the replies. Super helpful and has immediately spotlighted a bunch of challenges that will most likely make this a no-go for me.

    In terms of rent, I hadn’t appreciated we’d be paying 40% income tax on it which largely erodes the benefit we had hoped to pass on to the family member. I’d expected to pay tax, but rather naively hadn’t realised it stacked on top of employment income.

    I also hadn’t considered the impact of increased stamp duty for the next home or the impact on CGT relief on sale of the current home in the future. It also stands out that these costs would be incurred even if we let the family member stay in the home for free with no rent charged.

    The renting to family concern that has been rightly raised wouldn’t personally be any issue for me in this case, but solid advise in general I would agree.

    On balance given the impact of income tax, CGT and stamp duty, I just don’t see it stacking up unfortunately.

    Thanks again for the helpful replies.
    What you are observing is why the private rental sector is in decline pushing rents up.

    Being a private landlord has been politically unpopular for years and the upshot is life is getting harder for tenants as more landlords sell up.

    Politicians think putting the boot in to landlords will see more property available for home owners but the issue is affordability and supply … with interest rates climbing affordability is getting worse and I don’t see any acceleration in house building.

  23. #23
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    Quote Originally Posted by Montello View Post
    Politicians think putting the boot in to landlords will see more property available for home owners but the issue is affordability and supply … with interest rates climbing affordability is getting worse and I don’t see any acceleration in house building.
    Agree. Government doesn’t understand basic economics. A property moving from private rental to owner occupied doesn’t create an increase in the number of dwellings it just reduces the number of properties available to people who want or need to rent.
    Last edited by David_D; 10th September 2022 at 23:48.

  24. #24
    Master
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    Quote Originally Posted by David_D View Post
    Agree. Government doesn’t understand basic economics. A property moving from private rental to owner occupied doesn’t create an increase in the number of dwellings it just reduces the number of properties available to people who want or need to rent.
    Another view though is if there were enough properties going on the market that could depress house prices.

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