Renting to a Family Member Below Market Rent: How HMRC Caps Your Costs

Rent a home to a family member for less than the market rent and HMRC limits the costs you can claim on it. The costs of that property come off its rent only up to the rent itself. The let can never show a loss, and whatever the costs come to above the rent is lost: it cannot be carried to a later year or set against the profit from your other lets.

Charge the full market rent, on the terms you would give a stranger, and the family link changes nothing for tax. Let the home rent-free and it sits outside the property income rules altogether, so no costs can be claimed on it at all.

The tax rule is HMRC's and applies across the UK. The rules on safety, tenancies and council tax further down are England's; Wales and Scotland have their own. Every rule here was read on GOV.UK, in HMRC's manuals and on legislation.gov.uk on 25 October 2026.

Not tax advice. The tax figures are for a taxpayer outside Scotland. Where your case is unusual, use an accountant.

The rule in HMRC's own manual

HMRC's Property Income Manual sets the rule out at PIM2130 (updated 21 May 2026). Unless a landlord charges a full market rent and lets on normal market terms, HMRC says the costs of the property are unlikely to be spent wholly and exclusively for the business, which is the test every allowable cost has to pass. Strictly, none of them could then be deducted. HMRC's practice is to allow them up to the rent the property brings in, so the property "produces neither a profit nor a loss".

PIM4205 closes the other door. The excess of costs over rent on an uncommercial let cannot be deducted in the property business, so it can never become a loss. GOV.UK's rental income guidance gives the same rule, with a let to a friend or relative at a reduced rent as its example, and adds that the excess cannot be used in a later year, even one in which you start charging a commercial rent.

GOV.UK's own worked example is a flat let to the owner's sister for £300 a month, half its market rent. The year's rent is £3,600 and the costs are £4,000, so £3,600 of costs come off, the profit is nil, and the other £400 can be used neither in a later year nor against the rent from other properties.

HMRC taxes the rent you actually receive, not the market rent: in that example the rent counted is the £3,600 the sister pays. If the costs come to less than the rent, the profit is taxed like any other. Because the test turns on the market rent, write down what similar homes nearby are advertised at when the let starts. It shows the gap if HMRC ever asks.

A worked example: one family let beside one market let

Sarah owns two flats in England, neither with a mortgage. Her salary of £30,000 uses up her personal allowance, so her rental profit is taxed at the basic rate of 20%. The figures are for the 2025-26 tax year (6 April 2025 to 5 April 2026), whose online return is due by 31 January 2027.

Flat A is let to a stranger at the market rent of £1,100 a month. Flat B is let to her nephew at £450 a month, where similar flats nearby are advertised at about £950. In 2025-26 Flat B needed £4,800 of repairs after a burst pipe.

Flat B's £7,000 is the repairs, a £1,450 service charge, £490 of landlord insurance, the £90 gas safety check and £170 for the electrical inspection. That is £1,600 more than the flat's rent, and the £1,600 is lost. It does not reduce Flat A's profit, it does not go forward to 2026-27, and it would not come back if Sarah raised her nephew's rent to the market rate next year.

Without the rule, the two flats' figures would simply be added together: £18,600 of rent less £10,100 of costs, a profit of £8,500. With it, the profit is £10,100. At 20% the rule costs Sarah £320 of tax for the year. On a £60,000 salary, where the profit is taxed at 40%, it would cost £640.

In a quieter year the cap does not bite. Had Flat B's costs been £2,100, its profit would have been £5,400 less £2,100, which is £3,300, taxed like the profit on any other let.

Sarah's SA105

The SA105 has no box for an uncommercial let. Both flats go on the same pages, with Flat B's costs counted only up to its rent:

Her property income is under £90,000, so the SA105 notes let her enter the £8,500 as one total in box 29. Tax at 20% on £10,100 is £2,020. How to fill in the SA105 walks through every other box.

Mortgage interest, replaced items and the in-between cases

Mortgage interest

On a home you let, mortgage interest is not one of the costs in boxes 24 to 29. It goes in box 44 and gives a tax reduction of 20% of the lowest of three figures (how Section 24 works). PIM2130 and PIM4205, HMRC's pages on uncommercial lets, deal with costs and losses and say nothing about that reduction. If the family let is mortgaged, have an accountant settle box 44 before you fill it in.

Replacing a sofa, a fridge or a washing machine

The relief for replacing domestic items, box 36, is usually not available on an uncommercial let. PIM2130 says a new item for such a let would usually fail the relief's condition that the cost is wholly and exclusively for the business.

Part of the year family, part of it market

Let the same home at the market rent for part of a year and to family for the rest, and PIM2130 splits the costs between the two uses on a reasonable basis. The commercial share counts in full, even where it is more than that period's rent. The family share counts only up to the family rent. Heavy costs caused by the family use cannot be claimed by fitting them into a short commercial let.

A relative minding the home between lets

A relative who looks after the home between ordinary lets will not normally cost you the relief, if the home is genuinely available to let and you are looking for a tenant. HMRC's rough guide is a month in three years or more. A month that is really a family holiday loses the relief.

Small family rents: the £1,000 allowance

If the family rent is your only property income and comes to £1,000 or less in the tax year, the property allowance covers it and you need not tell HMRC, unless you are in one of the cases that cannot use the allowance. Above £1,000 you can take £1,000 off in place of your costs, but not as well as them, and not if you claim the 20% reduction for mortgage interest.

GOV.UK asks you to contact HMRC when gross property income is over £1,000 and up to £2,500 (tax-free allowances on property income). Its page on paying tax on rent (read 25 October 2026) sets the Self Assessment test: report the income on a return if it is more than £2,500 after allowable expenses, or more than £10,000 before them. A family let whose costs reach its rent makes no profit. With rent of £10,000 or less and no other property income, it does not meet that test on its own.

When they live with you

If the family member lives in your own home and pays you for furnished rooms, the Rent a Room scheme can apply instead: up to £7,500 a year tax-free, or £3,750 if you share the income with someone else. It applies automatically below that figure, though you can choose to put the income and costs on the property pages of your return. Lodger or tenant has the rules.

What a family tenancy still needs in England

The safety rules and the Right to Rent check apply whenever any rent is paid, however low, and three of them say in terms that the rent need not be a market rent.

Three points catch family landlords out:

• The Right to Rent check covers your own family. GOV.UK says to check every tenant aged 18 or over, even with no tenancy agreement or none in writing, and that checking only the people you think are not British is against the law. Right to Rent checks covers how.
• A spoken arrangement still needs the terms in writing. GOV.UK's guide to the written information says to give it before you sign or agree the tenancy, spoken agreements included, with a fine of up to £7,000 for not doing so. A family tenancy already running on 1 May 2026 needed the written information by 31 May 2026 if it rested on a spoken agreement alone, or the Renters' Rights Act Information Sheet by the same date if its terms were already in writing.
• The electrical and alarm rules have one family exclusion, and it is narrow. It covers a tenancy where the occupier shares a kitchen, bathroom, toilet or living room with you or a member of your family. A relative living on their own in a flat you let shares with nobody, so the rules apply.

A very low rent changes the type of tenancy as well. A tenancy with no rent, or one entered into since 1 April 1990 at £250 a year or less (£1,000 or less in Greater London), cannot be an assured tenancy (Housing Act 1988, Schedule 1, paragraphs 3 and 3A), and payments for council tax, services, repairs or insurance do not count as rent for that test. The gas, electrical, alarm and Right to Rent rules still apply if any rent is paid. If the rent is that low, take advice on what kind of tenancy it is.

If the arrangement breaks down, a relative on an assured tenancy has the same security as any other tenant. Ending it takes a Section 8 ground and, if they stay, a court order. The Section 8 grounds include Ground 1, for you or a close family member moving in.

One rule that is lighter for family

A council's selective licensing scheme does not cover a home you let to a member of your family who lives there as their only or main home, where you own the freehold, or a lease of more than 21 years that your own landlord cannot end early except by forfeiture (the Selective Licensing of Houses (Specified Exemptions) (England) Order 2006, article 2(1)(f)). Family here means a partner, parent, grandparent, child, grandchild, brother, sister, uncle, aunt, nephew, niece or cousin, with in-laws, step-children and half-relatives counted too. The exemption is from selective licensing only, not from HMO licensing. Selective licensing covers the schemes themselves.

Council tax, your lender and a later sale

Council tax. The adult who lives in the home as their main residence, on a tenancy or a licence, is liable for council tax before the owner is (Local Government Finance Act 1992, s.6). If they live on their own they can apply for 25% off the bill. If you pay it for them, it is one of the family let's costs and counts only inside the cap. Council tax on a rental property has the cases where the owner pays.

Your lender and insurer. If the home has a mortgage, tell your lender before your relative moves in. Consent to let explains what a lender's consent is. Tell your insurer as well.

A later sale. A home let to family is not your home, so the gain when you sell it can be liable to Capital Gains Tax, reported and paid within 60 days of completion: see Capital Gains Tax on buy-to-let.

Keeping the family let on its own line

Keep the family let's figures apart from the rest. LetCompliance runs the let from one login: the tenancy, the rent, the repairs and the costs, recorded as the year goes. Finance files each cost against its property in its SA105 category, on the tax year from 6 April. On a paid plan, from £7.99 a month, the SA105 tax pack lays the year out in its boxes. With two or more properties, on a plan from £14.99 a month, it also shows the profit of each, so a family let whose costs have passed its rent shows on its own line as a loss.

The pack does not apply the cap. It adds every property together, as the return does, and it does not know which let is not commercial. If the family let is your only let, or its excess turns the year into a loss, the pack records a loss for the year, carries it forward and takes it off later profits. The figures for that let, and any loss the pack carries forward from it, need correcting before they go on a return. Making Tax Digital updates are built from the same records, so ask your accountant how to reflect the cap there. Your accountant can work from a read-only link to the boxes, the ledger and the receipts, which every plan includes.