07-05-2025
‘I'm charging my relative to live with me. Should I tell HMRC?'
Email your tax questions to Mike at taxhacks@
Dear Mike,
I've had lodgers in the past, and I've declared the income properly to HMRC and claimed my relief under the Rent a Room scheme.
However, now a family member is moving in. I'm not charging her anywhere near as much – just enough to cover bills and the service charge on my flat, so do I still need to declare it? It just seems like a lot of faff – and I'll be under the £7,500 allowance for next year anyway.
The advice I've found online is unclear as to whether her contributions count as rental income or not – with some people seeming to rely on HMRC just not finding out, which is not really want I want to do!
– Peter
Dear Peter,
It is important that HMRC is aware of income that is potentially taxable unless there is specific exemption.
I agree entirely that you should not proceed on the basis that HMRC will not find out. That approach is misguided and wrong. The general rule is that all rental income, including that received from family members, should be declared to HMRC.
However, in your circumstances, I believe you are safe to proceed without reporting the income if that is the only income you are receiving on property during the tax year. This follows from the HMRC guidance, which says:
'The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. The tax exemption is automatic if you earn less than your threshold. Which means you do not need to do anything. You must complete a tax return if you earn more than your threshold.'
You do, nevertheless, raise a wider point which I will explain because it could be relevant in other circumstances.
There may be a perception by some that financial transactions within the family are no business of HMRC. That is not necessarily correct, and it is important to understand where tax issues can arise.
In particular, there can be a problem where you are letting property to a family member or other connected person and are claiming property expenses against rental income if, as a consequence, the expenses claimed are overstated. This is explained in the HMRC tax manual at PIM2130 which says:
'Expenses incurred by a customer on a property occupied rent free by, for example, a relative are likely to be incurred for personal or philanthropic purposes – to provide that person with a home. The same applies where the property is let at less than a commercial rate or isn't let on commercial terms.
'Unless the landlord charges a full market rent for a property (and imposes normal market lease conditions) it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes (PIM2010). So, strictly, they can't be deducted in arriving at property business profits.
'However, if the customer lets a property below the market rate (as opposed to providing it rent-free), they can deduct the expenses of that property up to the rent they get from it. This means that the un-commercially let property produces neither a profit nor a loss, but the excess expenses cannot be carried forward to be used in a later year.'
This rule extends beyond the immediate family to grandparents, grandchildren and their spouses. However, these rules will not be relevant in normal family circumstances where various family members come and stay with you whether or not they contribute to the running costs.
Alternatively, the rules may be relevant if you have a holiday home which you let out commercially but also let a friend or family member stay rent-free or a rent at less than full value.
You should also keep in mind that even for transactions within the family, it can be wise to involve a solicitor, depending on the circumstances – for example, it can be appropriate to have a formal tenancy agreement.
There is also a wider issue raised by your question about other financial transactions within the family. It is becoming more common for parents to help their offspring with loans to help them buy their first property, either for the deposit as an alternative to borrowing from the bank.
If interest is charged, it will be income of the parent as with any other loan. You can find guidance on this in the HMRC manuals at SAIM2440.
You are not required to draw up a loan agreement, but it can be helpful. Setting out the loan conditions in writing makes it clear to the borrower what your terms and conditions are for making the loan, including when the loan is to be repaid. This helps avoid misunderstandings and can be particularly useful where there is a subsequent separation or divorce in the family.
