Do HMRC demand we rent a second home at market rate?

Mediummag

Hi everyone -
We have inherited a flat and have paid the inheritance tax due - there's no mortgage on it. We have a family member who wants to live there for a small amount of rent. We saw a financial advisor who told us that we would be liable for income tax of 40% on any rental income we receive - that's of course fine - and he also said that HMRC could calculate the amount of tax due based on a property of that size in that location, and then demand that. Is that true? The average rent for this property is about £2k a month. 40% of that is £800 a month. If we rent out the property for e.g. £500 a month, and only contributed 40% of that when we file our tax return (£200), would HMRC get annoyed about the 'lost' tax and ask us to pay them the shortfall? That's what the IFA we saw seemed to suggest.

theartfullodger

They have the right to tax you on the basis of market rent.  And would be very suspicious of relative renting.  Who'd have issues if claiming HB


Much safer ordinary boring commercial rent to unrelated credit-checked persons, supporting relative who rents from someone else.

Normal advice is never rent to friends or family  

xylophone

https://www.property-tax-portal.co.uk/properties-let-cheaply-what-are-the-tax-implications.shtml#:~:text=• Uncommercial rent&text=Such properties are let at,comparable property in the neighbourhood.
Is above of any help?

Mediummag

Thank you @xylophone - I read that yesterday and still was a bit confused. It made it sound like if you let the relative live there for no/nearly no rent, that's fine, but you just won't be able to claim on expenses for the property. Which seemed fair enough. But that's different to what our IFA said, which was that if we collect any rent at all, then we will be liable for 40% of the market rate in tax - i.e. £800 per month. We do not want the relative to live there rent free.

And thanks too @theartfullodger - the tenant in question would not be claiming HB. Your first sentence, "They have the right to tax you on the basis of market rent" is exactly what our IFA said - I just can't find anything on the HMRC website or anywhere else to support that. Do you happen to know of a source?!

531063

As far as I am aware the tax man can only tax you on income received not make guesstimates about your income, I rent a property well below market value rent & have never been asked why by HMRC, and if I was would tell them to do 1

531063

theartfullodger said:

They have the right to tax you on the basis of market rent. 

Do you have a link to this.

Comms69

531063 said:

theartfullodger said:

They have the right to tax you on the basis of market rent. 

Do you have a link to this.

Must say i'd be interested also

xylophone

https://www.taxinsider.co.uk/renting-property-to-connected-people-below-market-value

Obviously, HMRC do not have the legal power to tell a landlord how much rent to charge, however, if a property is rented to a ‘connected’ person it is likely that HMRC will ask for confirmation that the rent being charged is at a commercial/market rate. This ‘market rate’ figure can easily be found by use of such websites as ‘Rightmove’ but HMRC will require written confirmation which can be obtained  from a reputable local letting agency.

General Income Tax Implications

If the tenant is ‘connected’ to the landlord and pays an amount at less than the market rate then HMRC will enforce the rules which centre round the amount of expenses that can be claimed as a deduction from the rental income received.

The full amount of expenses incurred will not be allowed. However, as a concession HMRC will allow the landlord to claim a total amount restricted to the rental income derived from that property. Expenses incurred in excess of this figure are not allowed to create a loss, neither can they be carried forward to be utilised in any future year; they are, therefore, wasted.

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2130

Mediummag

Ok - so this is what I was saying before - HMRC won't like it if I rent at below market rate - but the only issue for us is that we won't be able to claim as much on expenses. HMRC will not insist that we pay 40% of the market rate in tax. Just that we can't deduct as much on expenses.

As I understood it, HMRC would be thinking - "Hey, this flat could generate us £800 per month in tax, but because it's only being rented out at £500 a month, we're only getting £200 a month in tax. That's annoying." But from what you've just posted above, they're not bothered about the lower tax revenue, but rather they just want to make sure that we don't get clever with our expenses that we claim. Is that right?

Comms69

Mediummag said:

Ok - so this is what I was saying before - HMRC won't like it if I rent at below market rate - but the only issue for us is that we won't be able to claim as much on expenses. HMRC will not insist that we pay 40% of the market rate in tax. Just that we can't deduct as much on expenses.

As I understood it, HMRC would be thinking - "Hey, this flat could generate us £800 per month in tax, but because it's only being rented out at £500 a month, we're only getting £200 a month in tax. That's annoying." But from what you've just posted above, they're not bothered about the lower tax revenue, but rather they just want to make sure that we don't get clever with our expenses that we claim. Is that right?

Indeed, in particular when it comes to negative tax

Mediummag

Ok. So then my query is back to @theartfullodger who said very clearly, "They have the right to tax you on the basis of market rent." And that tallies with what my IFA said (I should add I've been trying to reach him to find out more from him, but haven't been able to). Is this just not true?