At times, a landlord may let a property at a rate that is below the current market rate, and even sometimes allow the property to be used rent-free by a tenant.
Particularly during and following the Covid-19 pandemic, landlords may reduce rent for tenants who are struggling financially, making them unable to meet normal rental payments.
In addition, if a landlord has a property that may become empty, they may agree to allow family or friends to rent the property on the cheap.
Most of the time, when the reduced rate is agreed, the impact on the deductibility of expenses is often overlooked.
What are the restrictions on relief?
Whilst landlords may seek to help out tenants, HMRC don’t see it like this.
For expenses to be deductible when computing the profits of the property rental business, expenses must have incurred wholly and exclusively for the purposes of the property rental business. If the landlord is not charging the full market rate for rent, then it’s unlikely that these standards are met, and as such, expenses are not deducted.
How are deductions made?
When a property is rented out for less than the market value, HMRC permit expenses to be deducted up to the level of the rental income received.
As such, the landlord is unable to create a loss in relation to the uncommercial let. Whereupon expenses exceed rental income, no relief is given towards recovering the excess expenses and they cannot be taken forward to the next year, even if the property is let at the commercial, market standard rate in that year. Furthermore, no deduction is permitted when the property is occupied by the landlord or their family or friends rent-free.
As such, it is recommended that landlords delay any significant expenditure when their property is let at an uncommercial rate, meaning that full relief for the expenditure can be claimed when the rate returns to normal.
What are the rules for house sitting?
If a property is empty, landlords may choose to elect a friend or relative to house sit the property.
If the property remains available for commercial letting and the landlord is seeking a tenant, expenses that are incurred during this period can be deducted. HMRC guidelines suggest relief will not be lost if a relative house sits for one month over a three-year period.
However, if a landlord allows a friend or relative to use the property for free to take a holiday, then no deductions can be made on expenses. If a holiday home is let commercially for some periods, and then used rent-free by the landlord or their friends or relatives, then expenses should be apportioned between commercial and non-commercial lets.
Expenses related to commercial use can be deducted in excess of the rent for commercial lets; however, expenses apportioned to uncommercial use can only be deducted up to the level of the rent received.
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