Mates’ rates and the rules on claim­ing for rental ex­penses

Yorkshire Post - Property - - FRONT PAGE - David King

THIS week we are look­ing at why let­ting to a rel­a­tive or a friend at be­low mar­ket rent can in­cur spe­cial treat­ment by the In­land Rev­enue.

It is some­times the case that a prop­erty, which is nor­mally let out on com­mer­cial terms and at the go­ing rate, is let to friends or rel­a­tives for for free, or at a be­low mar­ket rent.

In strict­ness, the tax leg­is­la­tion states that any ex­pen­di­ture in­curred on a prop­erty that is let at be­low com­mer­cial terms is not claimable, as the ex­pen­di­ture is be­ing partly in­curred for a “benev­o­lent or phil­an­thropic pur­pose”. How­ever, in prac­tice HM Rev­enue & Cus­toms (HMRC) will al­low a claim in some cir­cum­stances.

Where the ar­range­ment is for the prop­erty to be oc­cu­pied rent-free, the rev­enue ex­penses re­lat­ing to that prop­erty for that pe­riod would not be claimable. Where the ar­range­ment is for a be­low mar­ket rent to be paid, then you are able to claim for the ex­penses up to the level of the rent you re­ceive. Where the rent does not fully cover the ex­penses, the ex­cess is not claimable against any other rental in­come, ei­ther of the same year or fu­ture tax years. For an­nual costs and over­heads such as rates, in­sur­ance and mort­gage in­ter­est you would need to do a time-ap­por­tion­ment of the over­all costs to es­tab­lish the el­e­ment that re­lates to the rent-free pe­riod.

There is one “get out” from the re­stric­tions, which is where a rel­a­tive or friend oc­cu­pies the prop­erty as a “house-sit­ter”, per­haps in a pe­riod af­ter the last ten­ant has left and be­fore a new ten­ant has been found. It would be nec­es­sary for you to con­tinue to be ac­tively seek­ing new tenants in this case. In the event of a chal­lenge by HMRC you would need to be able to show that it was a gen­uine house-sit­ting and in­ter­est­ingly, although their pub­lished guid­ance states that there are no hard and fast rules in this area, they give an ex­am­ple where a rel­a­tive oc­cu­pies for one month in a pe­riod of three years, when they would nor­mally ac­cept such a house-sit­ting case. There is also a warn­ing that no re­lief is due where the rel­a­tive is re­ally just tak­ing a month’s hol­i­day in a coun­try cot­tage! Clearly, each of these cases would need to be looked at on their own mer­its, but there should be some scope for plan­ning to fall within the hous­esit­ting con­ces­sion. You should keep what­ever ap­pro­pri­ate ev­i­dence you have to sup­port your case, as this would be vi­tal in any HMRC en­quiry.

The pub­lished guid­ance also com­ments on the sit­u­a­tion where there is heavy ex­pen­di­ture which hap­pens to fall within the pe­riod of a short com­mer­cial let, but which pri­mar­ily re­lates to a pe­riod of non-busi­ness use. It would seem this is aimed at some­thing like a sig­nif­i­cant pro­gramme of re­pair work, which has been ar­ranged to take place within a com­mer­cial let pe­riod in or­der to try to ob­tain tax re­lief on the costs against rental in­come from other prop­er­ties. There would need to be a par­tic­u­lar set of cir­cum­stances for this to ap­ply but it is worth bear­ing in mind that HMRC could well look for fur­ther de­tails where sig­nif­i­cant costs are be­ing in­curred on a prop­erty where rental in­come is only be­ing shown as hav­ing been re­ceived for a short pe­riod.

With prop­er­ties that are hol­i­day homes there may be times when they are pro­vided free to rel­a­tives or friends. Here you will need to ap­por­tion the ex­penses on a rea­son­able ba­sis be­tween the com­mer­cial pe­ri­ods, when the prop­erty is ei­ther let or avail­able for let, and the other non­com­mer­cial pe­ri­ods, when it’s be­ing used by fam­ily and friends. The amount of ex­cess costs for the non-com­mer­cial pe­ri­ods is not claimable for tax pur­poses.

As al­ways, when try­ing to max­imise your claims for rental ex­penses you should seek ap­pro­pri­ate pro­fes­sional ad­vice.

David King is a tax con­sul­tant with Gar­butt & El­liott, Char­tered Ac­coun­tants and Tax Ad­vis­ers, with of­fices in Leeds (tele­phone 0113 273 9600) and York (01904 464100). David can be con­tacted at the York of­fice, or by email to dking@gar­butt-el­liott.co.uk.

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