Letting to family at below market rent

Q: What about interest, furnishings and equipment?

Mortgage interest. For residential lets, finance costs go into the basic rate tax reduction rather than being deducted. The reduction starts from the finance costs that would be deductible but for the restriction (PIM2058), and the general wholly and exclusively rules still apply (PIM2052). Interest on an uncommercial letting therefore faces the same limit as the other costs. See landlord mortgage interest relief. Replacing furniture and appliances. PIM2130 says replacement of domestic items relief will not usually be available, because the spending is not wholly and exclusively for the business. Capital allowances. Where plant and machinery is used in uncommercially let property, it goes into a separate pool and allowances are reduced on a just and reasonable basis (PIM2130).

Q: How does it work in practice?

Illustration only. A landlord has two commercial lets making a combined profit of £20,000. She also lets a flat to her daughter at £500 a month (£6,000 a year), when the market rent is £1,000 a month. The flat's costs, excluding interest, are £7,500. ItemBelow market rentIf let at market rent Rent from the flat£6,000£12,000 Expenses deducted£6,000 (capped)£7,500 Flat profitNil£4,500 Total property profit£20,000£24,500 The £1,500 of excess costs on the family flat is simply lost. It cannot reduce the £20,000, and it does not carry forward.

If you let a property to a relative for less than a full market rent, HMRC treats it as an uncommercial letting. You can deduct that property’s expenses only up to the rent it brings in, so it can show a profit but never a loss, and any excess cannot be set against your other lettings or carried forward. A property occupied rent free is outside the property income rules altogether.

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Why does a below market rent restrict expenses?

Property business profits are calculated using trading principles, so an expense is only deductible if it is incurred wholly and exclusively for the purposes of the business (section 272 of the Income Tax (Trading and Other Income) Act 2005, and section 54 of the Corporation Tax Act 2009 for companies). HMRC’s Property Income Manual at PIM2130 explains that when a property is let at less than a commercial rent, the expenses are normally incurred partly for a personal or philanthropic purpose, which is to give a family member a home. Strictly, that means none of the expenses would be allowable.

HMRC does not apply the rule that strictly. PIM2130 allows the expenses of a below market letting to be deducted up to the rent received from that property. The property then produces neither a profit nor a loss if its costs exceed its rent.

The reason this needs a special rule is pooling. All of an individual’s UK lettings form one property business, and rents and expenses are added together. Without the restriction, the costs of a family letting would reduce the tax on profits from your commercial lettings. PIM2130 describes the restriction as making sure that an uncommercially let property is not subsidised for tax purposes by the others.

What does HMRC treat as a commercial rent?

PIM2130 sets the test as a full market rent with normal market lease conditions. It does not give a percentage margin, so a rent noticeably below what an unconnected tenant would pay is at risk of being treated as uncommercial. The terms matter as well as the figure: a tenancy that is never reviewed, where arrears are routinely written off, or where the relative pays nothing towards costs a normal tenant would bear, points towards a family arrangement rather than a business.

Useful evidence includes:

a written rental valuation from a letting agent, or comparable listings, at the start of the tenancy and at each review;
a written tenancy agreement on the same terms you would offer anyone else;
rent paid by bank transfer on the due date, with arrears chased; and
rent reviews in line with the market.

If the relative genuinely pays a full market rent on normal terms, the letting is commercial and the usual rules apply, including relief for losses.

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How is the restriction worked out?

Take each uncommercial letting separately. Add up its expenses, and deduct them only up to the rent from that property. If the rent is higher than the expenses, the profit is taxable in the normal way. If the expenses are higher, the excess is lost: PIM2130 confirms it cannot be carried forward to a later year. Our page on rental losses explains the normal carry forward rules that uncommercial lettings are excluded from.

Where a property is let commercially for part of the year and used by family at other times, such as a holiday cottage, PIM2130 requires expenses to be apportioned on a reasonable basis. The commercial share of the expenses can be deducted in full in the overall business computation, even if it exceeds the commercial rent. The share relating to family use cannot. Heavy costs that arise mainly from the family use, such as repairs after a long family stay, cannot be pushed into a short commercial let period.

What if a relative lives there rent free or house sits?

A property occupied rent free is not being exploited as a source of rents, so it is completely outside the property income regime (section 266(1) ITTOIA 2005; PIM2130). Its costs cannot be set against any other lettings.

House sitting between commercial lets is treated more generously. If the property is genuinely available for commercial letting and you are actively seeking tenants, PIM2130 says ordinary house sitting by a relative for, say, a month in a period of three years or more will not normally lead to a loss of relief. A relative taking a month’s holiday in the property is a different matter.

What about interest, furnishings and equipment?

Mortgage interest. For residential lets, finance costs go into the basic rate tax reduction rather than being deducted. The reduction starts from the finance costs that would be deductible but for the restriction (PIM2058), and the general wholly and exclusively rules still apply (PIM2052). Interest on an uncommercial letting therefore faces the same limit as the other costs. See landlord mortgage interest relief.
Replacing furniture and appliances. PIM2130 says replacement of domestic items relief will not usually be available, because the spending is not wholly and exclusively for the business.
Capital allowances. Where plant and machinery is used in uncommercially let property, it goes into a separate pool and allowances are reduced on a just and reasonable basis (PIM2130).

How does it work in practice?

Illustration only. A landlord has two commercial lets making a combined profit of £20,000. She also lets a flat to her daughter at £500 a month (£6,000 a year), when the market rent is £1,000 a month. The flat’s costs, excluding interest, are £7,500.

Item	Below market rent	If let at market rent
Rent from the flat	£6,000	£12,000
Expenses deducted	£6,000 (capped)	£7,500
Flat profit	Nil	£4,500
Total property profit	£20,000	£24,500

The £1,500 of excess costs on the family flat is simply lost. It cannot reduce the £20,000, and it does not carry forward.

What if the relative lodges in your own home?

Letting a furnished room in your own home is a different situation. Rent a room relief can make the first £7,500 a year of gross receipts tax free (£3,750 if the income is shared). See rent a room relief.

What are the common mistakes?

Claiming a loss on a family letting and setting it against profits from other properties.
Carrying forward the excess costs of an uncommercial letting.
Not reporting the rent at all because the tenant is family, when the rent exceeds the costs and leaves a taxable profit.
Claiming replacement of domestic items relief on the family property.
Having no evidence of market rent when the rent is said to be commercial.
Treating rent free use as a void period and claiming the costs.

Undeclared rent from family lettings can be put right through a voluntary disclosure; see the Let Property Campaign.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.