Can You Rent a House to a Family Member?

It doesn’t have to be a hassle though! People rent places to family all the time, and with some practical ground rules in place early on, it can absolutely work out. Here, we’ll break down exactly what financial, legal, and other impacts kick in when leasing to people you know and love. We’ll explore how to set things up smartly so helping your family also helps your investment. Let’s get started:

Legal and tax implications of renting to family

Before renting to family members, you should double-check that your mortgage agreement, property terms, council housing rules, and community bylaws permit subletting. Converting any private residence into an income-producing asset often requires updated documents with approval from regulators. Even informally renting rooms to lodgers requires mortgage lender sign-off in most cases. You may even need to change the type of mortgage you have from a standard mortgage to a buy-to-let mortgage if your lender requires you to. Regardless, it’s vital that you tell your mortgage provider that you’re planning to rent to relatives.

Additionally, rental proceeds are considered taxable income, and that means it’ll need to be thoroughly tracked, documented, and reported to HMRC. Expect additional responsibilities when filing your tax return, and be sure to keep your figures accurate to ensure you pay the exact amount of income tax you owe. This means tracking rental income, tracking expenses, and documenting the tax owed.

This extra income can also impact eligibility for certain tax credits and financial support your tenants may receive. That’s why it’s essential that you consult both financial and legal professionals to avoid any missteps before entering into a formal agreement with a relative.

Financial implications

Beyond legal and tax implications, renting to relatives often tempts showing ‘favouritism’ through discounted “friends and family rates”. However, the market value rent still matters.  Your mortgage lender requires you to set the price high enough to cover the loan you received from them, any property maintenance, taxes, and enough to leave an adequate profit margin to protect their interests. Anything suspiciously below ‘fair’ rates raises red flags about long term sustainability. Average rents in the area demonstrate baseline expectations.

It’s equally important to consider if family loyalty and close ties make it difficult to objectively evaluate prospective family-tenants’ ability to reliably pay what they will owe in rent in the long term. Can they truly afford monthly housing expenses without depending on intermittent generosity to bridge budget shortfalls? In this instance the same principles that apply to regular tenants should also apply to family. They need to demonstrate a consistent income that can realistically support household costs without the need to rely on goodwill.

Prevent surprises - Formalise a detailed tenancy agreement upfront

We know, it might feel a little odd having a legal tenancy agreement between close family members, along with the formalities of security deposits and signatures.

However, these benefit and protect both parties in any tenancy agreement. Without any ground rules in place from the start, there will be inevitable confusion around important things like bills, maintenance duties, and even rent schedules and non-payment consequences.

Get ahead of any ambiguity by drafting a tenancy agreement that details total monthly rent, timetables, deposit handling procedure, maintenance obligations, and repercussions of delayed payment or damage. These basic guidelines should prevent any misunderstandings down the road. Please refer to your legal advisor for specific guidance.

However, if any conflicts do unfortunately arise despite best intentions, the signed agreement clarifies all parties’ responsibilities and protects interests without stirring up any accusations or debatable ‘implied’ terms. Having an honest discussion upfront will make balancing the family and business relationship much smoother.

Conduct tenant referencing for family members

When renting to relatives, it's wise to conduct similar financial background checks and referencing procedures as you would any tenant. This helps confirm ability to reliably make monthly rent obligations rather than jeopardise the rental income you rely on for expenses like such as the mortgage.

In fact, many lenders actually mandate conducting standard tenant screening and referencing processes before authorising rental tenancy, regardless if the applicant is related. Don't risk rejection by assuming relatives can receive automatic approval and skip income verification. Follow typical due diligence procedures to avoid any hassle.

The perks of renting to family

Yes, you need a formal agreement as with any rental agreement between strangers. But there are a few surprising benefits when renting your property to family. For starters, loved ones are more likely to maintain the property as if it’s their own, rather than a temporary living spot. There is a greater motivation to take general care of the property, deal with minor wear and tear, and protect any furniture and contents you’ve supplied. Such attentiveness from a tenant means lower lifetime repair and replacement costs for you.

Another upside is the satisfaction of providing relatives with stable, comfortable housing. Not to mention, the proceeds of the rent stay within your family rather than anonymous complexes. Realising these advantages hinges on having a fair written agreement. But the potential exists for a mutually rewarding landlord/tenant relationship that isn’t possible when renting to the general public.

Landlord insurance from Towergate

Renting out a property to relatives may seem like a convenient way to generate extra income while assisting loved ones. However, without proper precautions, mixing family ties with financial dealings risks seriously straining relationships. Still, consciously establishing boundaries through formal agreements and insurance protects all interests when navigating tricky tenant scenarios when they’re closer to home.

No matter who you let your property to, landlords insurance that covers the buildings and landlords contents is essential as it provides protection for any loss of rental income following damage to the building. (If you let unfurnished then your tenant will need to arrange their own contents insurance to protect from loss or damage.

Towergate landlords insurance can provide a robust building and landlords contents cover, and we can cover a wide range of tenants.

You can even add optional home emergency cover for extra peace of mind if you or your tenant loses the keys, the heating system, electricity or gas supply breaks down, and more. Get a quote online or call 0330 808 8251 to discover your options blending hassle-free property coverage with caring for your own.

We provide landlord insurance for a wide range of properties and tenants including multi occupancy, students, local authority placements, unoccupied and much more. See our landlords insurance page for more.

About the author

Alison Wild BCom (Hons), MAAT, MATT, Taxation Technician is a highly respected industry professional who has been working with and advising SMEs in areas including tax, pensions, insurance and marketing for over 25 years. She is a member of the Association of Accounting Technicians (AAT) and Association of Tax Technicians (ATT) and also has 20 years' experience as a residential landlord.

The information contained in this article is based on sources that we believe are reliable and should be understood as general information only. It is not intended to be taken as advice with respect to any specific or individual situation and cannot be relied upon as such.