If you are considering renting to family members it is important to give the decision careful thought. Any financial exchange with those close to you can present unexpected challenges.
Being related to your tenant does not guarantee a perfect landlord–tenant relationship. Your tenant may not have the same standards of living as you, manage their finances well or understand their tenant responsibilities. But the opposite can also be the case, and renting to family could be an excellent way to play it safe in the buy-to-let marketplace.
Where money is concerned, relationships can become strained. This is the last thing a landlord wants, especially if they rent to family. It is best to keep things on a professional level, not least for the benefit of your relationship with your tenant and other members of your family.
Outlined below are key points to consider and practical advice for landlords who are renting property to family.
You will need a regulated buy-to-let mortgage
A regulated mortgage product is one overseen by the Financial Conduct Authority (FCA) to ensure that consumers receive an appropriate product for their needs.
There are two scenarios in which a buy-to-let mortgage will be a regulated mortgage contract. The first is if you intend to occupy the property yourself at some point. The second is when the occupant will be a close family member.
There is one exception. If you or a related person occupy less than 40% of the property, the mortgage won’t fall under FCA regulation.
Please note that Commercial Trust does not deal with regulated buy-to-let mortgages.
Don’t rent to family without a tenancy agreement
Don’t forgo a tenancy agreement, even if you have every confidence in renting to a family member. You should be absolutely clear on both parties’ expectations and responsibilities. If everything is clear from the outset, it could prevent confrontations or misunderstandings that might impact your personal relationships.
Charging rent to family
You may be considering allowing a family member to live rent-free in your property. If this is the case, is it likely to cause friction amongst other family members? Is it commercially viable?
Allowing a tenant to occupy your property rent-free can have tax implications. If a property does not generate an income, it does not fall within the income tax regime. Thus, expenses incurred managing it will not be tax-deductible.
A nominal or ‘peppercorn’ rent might be more appropriate. But for a property to retain business status and thus enjoy fully deductible expenses, it is likely that you will need to charge full market rent.
If you have let your property before, you will have an idea of the amount you should charge. If you are new to the buy-to-let market, you can establish a rental amount by comparing similar properties in the vicinity. (When comparing properties, look at features such as the size of the property, its facilities, council tax banding, local amenities and nearby transport links).
Even though you are renting to family it is advisable to undertake property inspections. This will ensure that, if any maintenance problems arise, you are clear on what has caused them and can arrange for them to be fixed. It also gives peace of mind to both parties that everyone involved is upholding their obligations outlined in the tenancy agreement.
Remember, a family member may still raise a claim against you if they suffer injury from a maintenance problem you should have addressed.
Landlords insurance will protect you against damage to the property and contents provided as part of the tenancy. Some policies provide cover for legal costs and missed rental payments.
Again, even though your tenant is family, accidents do happen and unforeseen circumstances do arise. Eliminating any vulnerability will ensure things run smoothly for you both.
Housing benefit when renting to family
If you and a related tenant live together, your tenant will not be eligible for housing benefit. This affects the following family members:
- parents, step-parents and parents-in-law
- children, step children and sons/daughters-in-law
- siblings and half-brothers/sisters
- partners of any of the above family members
If your tenant is an ex-partner who is paying you rent for a property you used to share, they will not be eligible for housing benefit.
Your tenant may be eligible for housing benefit if they pay you rent for a property you don’t occupy.