Buy to let
Letting to a family member

You’ve bought an investment property on the basis you’ll let it out to make a return. But you’ve decided to rent it to a close friend or family member. What could possibly go wrong, right?

Letting to a family member

You’ve bought an investment property on the basis you’ll let it out to make a return. But you’ve decided to rent it to a close friend or family member. What could possibly go wrong, right?

Of course, there are huge positives renting to someone who is close to you. You know them well, you trust them, you know they’ll look after the place and always pay their rent on time. But perhaps things aren’t that simple. Of course you want to help and support your loved one, but there are rules and regulations that you’ll need to make sure you follow, despite the fact you’re renting to someone you know. Otherwise you face falling foul of the law or your mortgage company. And with that can come a whole host of problems.

You may be required to charge a certain level of rent

It doesn’t matter who is living in the property, if you’re looking for a buy-to-let mortgage for your rental, it’s likely your lender will require you to charge rent at 125% or higher than the monthly mortgage costs. Depending on the costs involved and the BTL mortgage rate you’ve secured, it may not be possible for you to provide your rental property at a discount. Even if it’s inhabited by friends or family.

Make sure the property is legally let

The fact that you know your tenants makes absolutely no difference when it comes to the need to abide by your responsibilities as a landlord.

Under the Housing Health and Safety Rating System, all properties that are let privately must abide by 29 rules and regulations whether or not your tenants are related to you.

The regulations require that rented properties are warm, free from damp and leaks. And that the electrics and gas have been tested and are safe. This is done via an annual gas safety check and regular electrical safety inspections. It is also a legal requirement that you have an up-to-date Energy Performance Certificate<link to EPC blog> demonstrating the property’s energy efficiency rating and highlighting whether further repairs or improvements to the property are necessary.

You will still be liable for tax

There are various tax implications for buy-to-let properties. It’s important you ask a tax expert for advice as we are not tax specialists. But in summary, you will need to pay income tax on any rent that is paid, once your costs of rental have been deducted.

You’ll also be liable for Capital Gains Tax when you eventually sell the property, as long as it sells for more than you paid for it.

If you agree to allow friends or family to stay in your property for free, or at a massively reduced rate, remember that you have these potential tax liabilities and make sure you have accounted for them so you don’t end up out of pocket.

Don’t neglect to have a rental agreement

Yes, it may be awkward, and you probably don’t feel it is necessary, but we would always advise that you sign a formal rental agreement. Despite the fact your tenants are friends or family. This is designed to protect both parties in the event that they fall out with each other, as family members and friends do have a tendency to do.  

If you put everything in writing, and sign on the dotted line, you can be sure that there will be no room for debate about what was agreed. If the worst happens and eviction becomes necessary, it’s likely the process would become incredibly lengthy, expensive and stressful if you didn’t have a contract in place.

This becomes even more important if your tenant decides to sublet a room in the property. Everyone living in the property will need to be detailed on the tenancy agreement. So if there isn’t one, the situation becomes muddied.

What happens to the property if something happens to you?

The need for a written contract or tenancy agreement isn’t just about protecting you, the landlord. Think about what would happen to your relative or friend if something happened to you when you were acting in the capacity of their landlord. Without any formalities attached, it’s possible that your friends or family would end up without any rights if you weren’t around anymore.

Would they be able to continue to rent the property? Would it have to be sold immediately? When you have an investment property it is always advisable to update your will to make sure your intentions are known. But if you have friends and family in the property it’s even more important to work through worst-case scenarios and make sure they’re covered.

While it may be tempting for both parties to form a casual agreement when it comes to renting a property to a close friend or relative, it’s not advisable. You might find yourself on the wrong side of your lending company, or worse, the law.

Need mortgage advice or support to purchase a buy-to-let? Speak to one of our specialist lenders who’ll search the market to help you find the right deal for your specific situation.

By Michael Aldridge