An In-Depth Look at the Rules Around Letting to Family Members
Renting out property to family members can seem like an attractive proposition, allowing you to provide housing for loved ones while also benefiting from rental income. However, there are some important rules and considerations to bear in mind if you plan on letting your buy-to-let property to your son or other relatives.
Overview of Letting to Family Members
In general, there is no legal barrier to letting your buy-to-let property to a family member. Landlords are free to choose who they rent to, including relatives.
However, you will need to follow the same legal processes and meet the same obligations as you would with any other tenant. This includes:
- Drawing up a written tenancy agreement
- Protecting any rental deposit in a government-approved scheme
- Complying with safety regulations like gas and electrical checks
- Paying tax on rental income
You also cannot show preferential treatment or discriminate against other prospective tenants based on their lack of family ties.
Impact on Mortgage Terms
If your buy-to-let property is mortgaged, your lender’s consent may be needed before letting to a family member. Most standard buy-to-let mortgages do not allow this, so you would need consent or to remortgage to a specific family member mortgage.
Lenders can be cautious about letting to relatives because it does not demonstrate normal commercial intent to generate rental yields. There is also a perceived risk that you may not enforce contractual obligations as firmly with a family member.
To get consent, you will likely need to demonstrate that:
- Rent will be charged at market rate
- A comprehensive tenancy agreement will be signed
- You will comply with legal responsibilities as a landlord
Some lenders will also want to see evidence that the family member can afford the rent.
Tax and Insurance Implications
Letting to family can also impact your tax position and insurance cover:
- Rental income from a family member is still subject to income tax in the normal way
- You cannot offset mortgage interest against rents from relatives if they live with you
- Take care to ensure any rental agreement reflects genuine commercial reality
- Standard buy-to-let insurance may exclude damage caused by tenants who are relatives
- Specialist policies are available to cover associated risks
- Make sure you have appropriate cover in place
Protecting Your Interests
Although letting to family can work well, you also need to protect your own interests:
- Have a written tenancy agreement – This provides clarity and prevents disputes. Ensure your son understands his contractual obligations.
- Charge market rent – This rental income may be vital for covering your costs. Avoid the temptation to charge reduced “mates rates”.
- Get the right insurance – Don’t risk being underinsured. Take out specialist policies if needed.
- Document rent payments – Keep records to show this is a legitimate rental transaction.
- Enforce contractual terms – Don’t let family ties cloud your judgement if problems occur. Follow standard processes.
- Be tax compliant – Declaration of rental income and allowable expenses/deductions is essential.
Deciding If Letting to Family Is Right for You
Letting your investment property to a family member can work well provided you take the right approach. Consider:
- Will you be able to objectively manage the tenancy and enforce contractual terms? Personal relationships can make this difficult.
- Are you ready to accept the tax and insurance implications? Make sure you understand how letting to family impacts this.
- Will you still generate adequate rental yields after any mortgage restrictions? Lender consent may limit income potential.
- Is your buy-to-let investment right for the family member’s needs? Consider other housing options too.
Done right, letting to a son or other relative can provide housing solutions for loved ones while also continuing to benefit from buy-to-let ownership. But tread carefully and take professional advice to protect your interests.
Key Legal Obligations When Letting to Family Members
If you decide to rent your investment property to a family member, you will need to comply with important legal responsibilities. Here are some key obligations to be aware of:
A written tenancy agreement is essential, even when letting to relatives. This provides clarity on:
- Start and end dates
- Rent amount and payment schedule
- Any bills or services included
- Deposit amount and protection
- Rights and responsibilities of both parties
Verbal agreements are open to misunderstanding. A comprehensive tenancy agreement protects both your and the tenant’s interests.
Landlords are legally required to protect any deposit in a government-approved tenancy deposit scheme. This applies even if renting to family members.
You will need to register the deposit and issue the tenant with prescribed information about the scheme used. At tenancy end, deposits must be returned in accordance with scheme rules.
You must comply with safety standards to minimize risks in your rental property. This includes:
- Gas safety record and checks yearly by a Gas Safe engineer
- Electrical safety inspections every 5 years
- Furniture and furnishing regulations
- Smoke and carbon monoxide alarms installed
Do not be tempted to skip these just because the tenant is a relative. Breaches can invalidate your insurance and lead to prosecution.
Right to Rent Checks
Under immigration rules, landlords in England must check tenants have the right to rent in the UK. This includes family members who are tenants.
You need to see and copy ID/visa documents proving their right to rent before letting. Further checks may be needed if the tenant’s leave expires during the tenancy.
Even if letting to relatives, you must declare rental income on your tax return and pay income tax due. Mortgage interest, maintenance costs and other allowable expenses can be offset subject to some restrictions.
Ensure you keep proper records and understand which expenses you can and cannot deduct for tax purposes.
Practical Tips for Successfully Letting to Family
Letting your investment property to family brings challenges as well as opportunities. These practical tips can help ensure it works well:
Agree House Rules
To avoid tension, have an open discussion about household rules and expectations beforehand. This can cover areas like cleaning, visitors, noise and privacy.
Agreeing some basic house rules upfront prevents misunderstandings down the line. Set these out clearly in the tenancy agreement.
Treat it as a Business Transaction
It can be difficult when family relationships and business interests overlap. Try to approach the tenancy with businesslike professionalism.
Have a proper tenancy agreement, follow legal processes, document rent etc. Keeping everything formal minimizes problems if disputes arise later.
Review Rent Annually
When setting rent for a family member, charge market rate. Review this annually and increase as appropriate. This maintains rental income to help cover your costs.
Avoid the temptation to let relatives live there cheaply. This jeopardizes the viability of your buy-to-let investment.
Manage Issues Objectively
If problems occur, try not to let emotion cloud your judgment. Follow standard dispute resolution processes like you would with any tenant.
Managing disputes objectively, based on contractual terms, reduces the risk of damaging personal relationships long term.
Plan for All Eventualities
Consider backup plans if the arrangement stops working out. For example, what if your relative wants to leave early? Or fails to pay rent? Or causes damage?
Hope for the best, but have contingency plans ready just in case. This protects both your interests if difficulties arise.
Take Professional Legal Advice
Letting to family members has legal and tax implications. Seek tailored professional advice before proceeding to ensure you fully understand your obligations and risks.
Spending a little on legal advice early can prevent expensive problems further down the line.
Pros and Cons of Letting Your Buy-to-Let to a Relative
Weighing up the potential benefits and drawbacks of renting to family members is essential:
Helps house family – Provides accommodation solutions for loved ones close by.
Income from vacant property – Generates rental revenue from empty properties.
Lower void periods – Family may rent long term leading to fewer void periods.
No agent fees – Saves letting agent commission if managed directly.
Flexible arrangements – Can potentially accommodate change requests more easily.
Family disputes – Arguments can poison relationships and complicate tenancy issues.
Lower rental yields – Family may expect mates rates rather than market rent.
Property damage – Tenants who are relatives may take less care than strangers.
Difficult to enforce tenancy – Being stricter on family over late rent etc. can be awkward.
Tax implications – Letting to relatives impacts allowable expenses and deductions.
Insurance limitations – Standard BTL policies may exclude family members.
Think carefully about whether the benefits outweigh the risks in your particular circumstances.
Key Considerations When Letting to Family Members
Letting to relatives can work well but it is not for everyone. Ask yourself these key questions to decide if it is right for you:
- Will you be able to objectively manage the tenancy and property on a businesslike basis?
- Are you willing to charge market rate rent and enforce this if your relative fails to pay?
- How will you handle property damage or disputes arising from the tenancy?
- Can you evict your family member if required in line with contractual terms?
- Are you prepared to declare all rental income and expenses to comply with tax rules?
- Will your buy-to-let mortgage lender consent to you letting the property to a relative?
- Does your insurance policy provide adequate cover for a family member tenant?
- Do you have contingency plans if unforeseen problems arise during or after the tenancy?
- Overall, are the risks outweighed by the benefits in your personal circumstances?
Unless you can confidently answer these questions, letting your buy-to-let investment property to your son or another family member may not be advisable. Take time to carefully consider all aspects before making a decision either way.
Alternatives to Letting Property to Relatives
If you are uncomfortable about directly letting to family members yourself, what are the alternatives? Here are a few options worth considering:
Letting Agent Management
Appoint a letting agent to manage the tenancy. This puts a degree of professional distance from any disputes involving a relative.
The agent can handle setting and enforcing rent, property maintenance issues, deposit protection and disputes. This takes the strain out of your family relationships.
Limited Company Letting
Holding your buy-to-let property via a limited company means any tenancy is with the company, not you personally.
While tax implications need consideration, this business separation can make enforcing tenancy terms easier if things go wrong.
Short Term Lets
Offer family members short lets via services like Airbnb rather than standard AST tenancies.
This provides temporary accommodation as needed but on a less formal basis than a 6 or 12 month tenancy.
Sell the Property
If unhappy with the idea of relatives as tenants, consider selling your buy-to-let investment and using the capital another way.
While not always ideal, this removes the need to make that direct or difficult choice altogether.
Letting your buy-to-let property to a son or other family member can work well if handled correctly. However, it also comes with risks that need careful management.
Follow rental laws and best practices even with relatives as tenants. Have a proper tenancy agreement in place and document everything appropriately.
Charge market rate rent, handle disputes objectively and be prepared to enforce contractual terms if needed. Also consider how it impacts your taxes, mortgage and insurance cover.
Most importantly, think carefully about whether benefits really outweigh drawbacks for you. If in doubt, seek legal advice and look at alternative solutions.