Renting To Family Members: The Law In The UK

Renting To Family Members_ The Law In The UK

If you have a property and are thinking of renting to family members and want to know the law in the UK, this article is for you.

Renting a property to a family member is not illegal but you still need to be aware of the rules and regulations covering tenancies.

There’s no doubt that renting a property as a landlord can be a stressful experience.

What with missed rent, finding quality tenants and maintaining a rental property means this tends to be a more time-consuming undertaking than many property investors appreciate.

For this reason, it may be tempting as the landlord to simply rent the property to friends or family because these are people that you already get on with.

However, you will still need to remain on the right side of the rules and comply with relevant laws – including paying tax on your rental income.

At this point, we must highlight that the information in this article should not be taken as legal advice and you should always speak with a legal professional before renting a property to a family member.

Is it illegal to rent a property to a family member?

As mentioned, it is not illegal to rent a property to a family member but if you have a mortgage, then this could be a tricky issue.

Firstly, you will need permission from the mortgage lender if you are looking to rent out the property to tenants.

However, a mortgage lender that has offered a buy to let mortgage may look at renting to a family member as a higher risk.

This could also lead to the lender imposing stricter lending criteria.

A mortgage lender may refuse permission for a borrower to have tenants who are family or friends in the home they have bought using a mortgage.

And this may extend to a buy to let mortgage lender as well because of the risk involved.

But why would a mortgage lender look at family and friends renting a property, differently from strangers?

There’s a very simple explanation, and most potential landlords will already appreciate what it is.

Put simply, a lender may believe:

  • You may be more lenient with a family member as a tenant than a stranger;
  • If the family member is not a responsible tenant, you may have issues imposing rules and even evicting them;
  • The lender may believe that you will charge less than the market rate to a friend or family member.

The bottom line is the lender may be worried about issues affecting how much you earn from the property so it is always a good idea to speak with your lender about their criteria when it comes to renting to family and friends – and you should do this before you promise the property to someone.

Renting to a family member also means that as a landlord you have responsibilities and rules to follow, which we explain later.

When renting to a family member, do I need a tenancy agreement?

Whether you are renting to strangers or to a family member, you always need a tenancy agreement.

There’s only one answer to the question about needing a tenancy agreement when renting to a family member, and it is ‘Yes!’.

A tenancy agreement puts in writing what is expected from the tenant and from you as a landlord.

The agreement also makes clear what the rent is and when it needs to be paid.

A tenancy agreement will also help deal with potential disagreements in the future and it’s a good idea to have an inventory carried out, so the condition of the property is recorded, as well as its contents before your family member moves in as a tenant.

Do I need a deposit when renting to family?

The issue of whether you take a deposit from a family member when renting a property to them is a personal decision.

But the main reason why landlords will ask for a deposit is to pay for any damage or lost items when the tenancy ends.

Landlords must:

  • Place their tenant’s deposit into a government recognised deposit scheme – this is a legal requirement;
  • As the landlord, you must tell your tenant where their deposit is being held;
  • The tenant must be informed of where their deposit is within 30 days of moving in.

Placing the deposit with an independent third party makes it easier for the tenant to get their deposit back after leaving the property and having followed the agreement’s terms.

Also, you should read the Tenant Fees Act 2019 because landlords are restricted from charging tenants for some damage including wear and tear issues.

Can I offer a family member discount on rent as a tenant?

We have already highlighted that mortgage lenders tend to be wary when a landlord rents a property to a friend or family member.

One reason for this is that a buy to let mortgage lender will usually insist that the rent you charge is at least 125% higher than the mortgage costs every month.

This may mean that as a landlord you’re in no position to offer family or friends a discount on the rent – and the lender won’t allow you to let them live in your property for free.

The other issue about offering a discounted rent to a family member is when you need to increase it at a future date.

This can be something of a financial minefield because when money is involved, relationships can become strained.

Do I need to pay tax when renting to a family member or friend?

All rent paid by a tenant is deemed as income which will be taxed – minus the landlord’s costs and overheads.

There are some tax implications that a landlord will need to follow and it’s a good idea to secure the services of an accountant with experience in dealing with rented properties to ensure that you keep accurate financial records and pay any tax due.

Can I rent to a family member on Universal Credit?

There’s nothing to stop you as a landlord from renting your property to a family member who is claiming Universal Credit, or housing benefit.

However, you will need to have a formal agreement in place, and you must not live with them.

What happens to a family tenant when I die?

You might not like it, but it is always good to account for a bad thing. Discuss with your family tenant what happens when you die.

While this subject is not one that many people, let alone landlords want to discuss, it is an issue to confront.

If you are renting a property to a family member or friend, then you need to discuss with them what will happen when you die.

That’s because the terms of your will may mean they have to move out.

Renting to family members – what you need to do

While this article from Property Road highlights that you will not be breaking the law when renting a property to family members or friends, you should follow the rules and take your role as a landlord seriously.

Tenant referencing for a family member

We’ve mentioned before that while you may know and trust a family member or friend, it’s still worth carrying out tenant referencing.

As a professional landlord, this is a process you would do because you are about to enter a legal agreement.

A tenant referencing process will reveal whether the tenant can afford to pay the rent and you’ll find out how well they got on with a previous landlord.

Tenancy agreements for renting to family

A tenancy agreement is a crucial part of renting to a family member. It will:

  • Lay down the responsibilities and rights of the tenant and the landlord;
  • The landlord and tenant will need to sign this agreement;
  • As a legal document, it will help prevent any misunderstandings or even difficult conversations when your tenant becomes less than a model tenant.

The tenancy agreement will also make clear that you are requesting a deposit and that this will be used to pay for any damage.

Again, having a deposit in place will also help deal with those uncomfortable conversations when a family member tenant leaves the property, but repairs will need to be paid for.

Don’t forget too that this deposit must be held with a government recognised scheme.

How much rent should I charge a family member tenant?

It’s one thing renting a property to a family member because you trust them, but it’s something else to charge less than the market rate.

While you may be doing your family member or friend a favour, this may be an issue with your mortgage lender, if you have one.

Indeed, with a buy to let mortgage, the lender may specify the minimum amount of rent that is necessary, and this amount varies between lenders but expect it to be at least 120% of your monthly mortgage repayment.

If you own the property outright, then you can do what you like with it and not demand rent be paid.

You may decide to go one step further and offer the property on a rent-free basis but be aware that there may be some tax implications when doing so, and it’s worth reading HMRC advice on this subject of renting property to family members.

And having an experienced accountant in place will also smooth out any potential future financial and tax issues.

Renting to family members: the law UK and other issues

As a landlord, you also need to consider:

Maintenance

As the landlord, you are the one responsible for maintaining the property to be a safe and comfortable dwelling. Do not avoid this responsibility even though it’s a family member or friend living as a tenant in your property.

Landlord insurance

Regardless of how well you get on with your friend or family member, it’s important to have the right landlord insurance in place. This will protect you against legal costs, property damage and any missed rent payments – though landlord insurance comes with various levels of cover, so you need to check properly before signing up to deal.

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