IS IT WORTH BUYING A HOUSE TO RENT OUT TO MY PARENTS?
Alexandra Ventress
October 20th, 2023
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Renting out a property is a big financial responsibility to undertake, however, it can be an incredibly rewarding one. A great source of extra income and the chance for financial freedom, becoming a landlord is a choice that more and more potential investors are making.
And who better to rent a property out to than your own family? One of the most challenging parts about becoming a landlord is looking for good tenants to rent out your home to, so why not bypass the hassle and simply rent to your parents or other family members?
In this blog post, we will be looking at whether it is worth renting out your property to your parents or other family members, how the tax implications behind buy-to-let property and how we can help you on your investment journey.
Yes, you can! If you wish to rent an investment property to your parents or any other family member you will be able to do so. But it is critical that you have the right mortgage in place before you do so. Whilst they may be your family, they are still your tenants, and there are rules and obligations that you must follow as result.
What are the laws surrounding renting to a family member?
The biggest law when it comes to renting to family members is ensuring that you have the correct mortgage in place. You must also ensure that you inform your mortgage lender that you are planning to rent your property to a family member. If you fail to do then you could be charged with committing mortgage fraud.
Every lender will have a different criteria, so be sure to be open and honest about your intentions when it comes to renting.
You will need to be aware that not every lender will be willing to lend to you because:
- Buy-to-let mortgages where the landlord and tenant are related are often viewed as more high-risk
- Should you need to evict your family member it imposes rules you may run into bother
- Lenders may be wary of you charging mates rates
Do I need a buy-to-let mortgage when renting to parents?
Yes, you do! When renting to any family member you will need to take out a buy to let mortgage.
You will also need to tell your lender that you are planning to rent to someone in your family if they are:
- your sibling
- your parent
- your grandchild
- your grandparents
- your spouse and civil partner
Should you be renting to cousins, uncles, aunts, nephews, or nieces are not typically classed as close family members, however, you will need to check with your lender nonetheless.
Does renting to family count as income?
Any rent that you are paid by a tenant, regardless of whether they are family or not is considered to be income. This means that as a result you may be required to pay income tax and national insurance on what you earn.
If you let your property to a family member or to a friend and you receive any rent, you must declare it. Should the rental income be higher than the costs, then you may need to pay tax on the excess income.
If the property in question is a second home or a buy-to-let property that sells for more than you originally purchased it for, then you will more than likely be charged Capital Gains Tax. This will typically be owed at the current rate on the increase in value, with any allowable costs and your personal tax-free allowance deducted.
Do you pay less tax if i rent to family?
As we have already mentioned, if you have let your buy-to-let investment property to a family member or to a friend and you receive any rent, you must declare it to HMRC. Regardless of whether you know your tenants personally or not, you are required by law to declare any rental income you earn and pay tax on it where appropriate.
Am I able to charge a reduced rate to family members?
If you decide to charge your tenant less rent than is required, then you could cause issues with your lender. This is because as with any buy-to-let mortgage affordability test, you will be required to ensure that your monthly rent covers at least 25% of your monthly mortgage.
If you pay your tenants less, then the affordability of your mortgage will be impacted.
What to consider before renting to family?
Whilst you may not feel the need to draw up a contract for your family members, it is an important part of the renting process that needs to be upheld. Whilst blood may be thicker than water, there is no telling what the future may hold so it is always wise to protect yourself and your tenants by drawing up a tenancy agreement.
As your tenant will be regularly paying you for a service, this could be viewed as an unwritten tenancy agreement. This unwritten agreement will protect the tenant, so it is recommended to draw an official one up in order to protect your rights.
Furthermore, if the property you are renting out has a regulated buy-to-let mortgage in place, then your lender will require you to have an assured shorthold tenancy in place.
You will also need to consider the cost of maintaining your rental property. By having a tenancy agreement drawn up, you will be able to have who is responsible for the costs of repairs and maintenance in writing. Doing this will help you to avoid any grey areas further down the line.
Regardless of who you intend to rent out the property to, you will be required by law to pay stamp duty. Furthermore, income tax will need to be paid and capital gains tax will need reporting.
You will also need to factor in the costs for the insurance that will be required for both your investment property, but also the contents. If you put into place an official written contract you will be able to outline who is responsible for what.
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Can my parents rent a house for me?
Yes, they can. In the UK it is legal to rent a property on behalf of another party. It is most often done for family members, such as students who rely on their parents for rent, however, anyone can rent on behalf of anyone. It is worth noting that you must be 18 to sign a tenancy agreement.
Buying my parents house and renting it back to them
Yes, you can. But when you purchase the property, you will need to make your lender aware that the property will be rented to a family member. As we have already mentioned, renting to a family member can be viewed as high risk and failing to inform your lender may be viewed as mortgage fraud.
If you plan to purchase your parent’s house outright and rent it back to them then you will not need to inform a lender. However, you may need to pay stamp duty land tax, capital gains tax, and income tax, so you will need to become familiar with the different taxes you may be liable for.
When it comes to renting out your buy to let property to your family members, you will need to carefully check your mortgage terms in order to ensure that you are able to rent it to relations. If you have a standard buy-to-let mortgage, then you may be unable to rent to family members. If this is the case, you may want to consider taking out a specialist buy-to-let mortgage.
A specialist buy-to-let mortgage is a lot more regulated than a standard buy-to-let mortgage. This is due to mortgage providers viewing letting to family members as high risk, as the chances of landlords being more lenient with family members and allowing them to pay less rent is higher.
If you have decided to rent out your own home to your family members, then you will need to gain consent to let. This can be done by contacting your mortgage provider, however, they are not obliged to grant it.
Whilst letting out a property is a great way to get extra income, it is important that you declare any earnings to HMRC. HMRC has multiple methods for tracking down landlords who have not declared extra rental income they are receiving. One such method is to check land registry lists to identify those who have paid Stamp Duty Land Tax. They are also able to check the electoral register to determine who is living at an address and use data to track rental income.
If the HMRC find out that you are in debt to them, they could end up facing penalties or even prosecution. Should you decide to pay back tax and interest owed, there is an amnesty, but penalties will still be applied.
HMRC does offer support for landlords in tracking their rental income, to avoid getting caught out.
Can I buy a house and rent it out immediately?
Exactly how quickly you can rent out your property depends on the type of mortgage you have. If you have a residential mortgage, then your lender will be less likely to grant you permission to let out your home.
If you have a buy-to-let mortgage, you should check with your mortgage broker or lender to see the terms of your mortgage. This is where you will find out any terms or clauses revolving around renting out your property.
If you own the property outright then you are able to rent it out as soon as you wish as you will have no lender rules to abide by.
Start your property portfolio today!
Renting out a property is a big financial responsibility to undertake, however, it can be an incredibly rewarding one. A great source of extra income and the chance for financial freedom, becoming a landlord is a choice that more and more potential investors are making.
And who better to rent a property out to than your own family? One of the most challenging parts about becoming a landlord is looking for good tenants to rent out your home to, so why not bypass the hassle and simply rent to your parents or other family members?
In this blog post, we will be looking at whether it is worth renting out your property to your parents or other family members, how the tax implications behind buy-to-let property and how we can help you on your investment journey.
Yes, you can! If you wish to rent an investment property to your parents or any other family member you will be able to do so. But it is critical that you have the right mortgage in place before you do so. Whilst they may be your family, they are still your tenants, and there are rules and obligations that you must follow as result.
What are the laws surrounding renting to a family member?
The biggest law when it comes to renting to family members is ensuring that you have the correct mortgage in place. You must also ensure that you inform your mortgage lender that you are planning to rent your property to a family member. If you fail to do then you could be charged with committing mortgage fraud.
Every lender will have a different criteria, so be sure to be open and honest about your intentions when it comes to renting.
You will need to be aware that not every lender will be willing to lend to you because:
- Buy-to-let mortgages where the landlord and tenant are related are often viewed as more high-risk
- Should you need to evict your family member it imposes rules you may run into bother
- Lenders may be wary of you charging mates rates
Do I need a buy-to-let mortgage when renting to parents?
Yes, you do! When renting to any family member you will need to take out a buy to let mortgage.
You will also need to tell your lender that you are planning to rent to someone in your family if they are:
- your sibling
- your parent
- your grandchild
- your grandparents
- your spouse and civil partner
Should you be renting to cousins, uncles, aunts, nephews, or nieces are not typically classed as close family members, however, you will need to check with your lender nonetheless.
Does renting to family count as income?
Any rent that you are paid by a tenant, regardless of whether they are family or not is considered to be income. This means that as a result you may be required to pay income tax and national insurance on what you earn.
If you let your property to a family member or to a friend and you receive any rent, you must declare it. Should the rental income be higher than the costs, then you may need to pay tax on the excess income.
If the property in question is a second home or a buy-to-let property that sells for more than you originally purchased it for, then you will more than likely be charged Capital Gains Tax. This will typically be owed at the current rate on the increase in value, with any allowable costs and your personal tax-free allowance deducted.
Do you pay less tax if i rent to family?
As we have already mentioned, if you have let your buy-to-let investment property to a family member or to a friend and you receive any rent, you must declare it to HMRC. Regardless of whether you know your tenants personally or not, you are required by law to declare any rental income you earn and pay tax on it where appropriate.
Am I able to charge a reduced rate to family members?
If you decide to charge your tenant less rent than is required, then you could cause issues with your lender. This is because as with any buy-to-let mortgage affordability test, you will be required to ensure that your monthly rent covers at least 25% of your monthly mortgage.
If you pay your tenants less, then the affordability of your mortgage will be impacted.
What to consider before renting to family?
Whilst you may not feel the need to draw up a contract for your family members, it is an important part of the renting process that needs to be upheld. Whilst blood may be thicker than water, there is no telling what the future may hold so it is always wise to protect yourself and your tenants by drawing up a tenancy agreement.
As your tenant will be regularly paying you for a service, this could be viewed as an unwritten tenancy agreement. This unwritten agreement will protect the tenant, so it is recommended to draw an official one up in order to protect your rights.
Furthermore, if the property you are renting out has a regulated buy-to-let mortgage in place, then your lender will require you to have an assured shorthold tenancy in place.
You will also need to consider the cost of maintaining your rental property. By having a tenancy agreement drawn up, you will be able to have who is responsible for the costs of repairs and maintenance in writing. Doing this will help you to avoid any grey areas further down the line.
Regardless of who you intend to rent out the property to, you will be required by law to pay stamp duty. Furthermore, income tax will need to be paid and capital gains tax will need reporting.
You will also need to factor in the costs for the insurance that will be required for both your investment property, but also the contents. If you put into place an official written contract you will be able to outline who is responsible for what.
See what we can do for you!
Can my parents rent a house for me?
Yes, they can. In the UK it is legal to rent a property on behalf of another party. It is most often done for family members, such as students who rely on their parents for rent, however, anyone can rent on behalf of anyone. It is worth noting that you must be 18 to sign a tenancy agreement.
Buying my parents house and renting it back to them
Yes, you can. But when you purchase the property, you will need to make your lender aware that the property will be rented to a family member. As we have already mentioned, renting to a family member can be viewed as high risk and failing to inform your lender may be viewed as mortgage fraud.
If you plan to purchase your parent’s house outright and rent it back to them then you will not need to inform a lender. However, you may need to pay stamp duty land tax, capital gains tax, and income tax, so you will need to become familiar with the different taxes you may be liable for.
When it comes to renting out your buy to let property to your family members, you will need to carefully check your mortgage terms in order to ensure that you are able to rent it to relations. If you have a standard buy-to-let mortgage, then you may be unable to rent to family members. If this is the case, you may want to consider taking out a specialist buy-to-let mortgage.
A specialist buy-to-let mortgage is a lot more regulated than a standard buy-to-let mortgage. This is due to mortgage providers viewing letting to family members as high risk, as the chances of landlords being more lenient with family members and allowing them to pay less rent is higher.
If you have decided to rent out your own home to your family members, then you will need to gain consent to let. This can be done by contacting your mortgage provider, however, they are not obliged to grant it.
Whilst letting out a property is a great way to get extra income, it is important that you declare any earnings to HMRC. HMRC has multiple methods for tracking down landlords who have not declared extra rental income they are receiving. One such method is to check land registry lists to identify those who have paid Stamp Duty Land Tax. They are also able to check the electoral register to determine who is living at an address and use data to track rental income.
If the HMRC find out that you are in debt to them, they could end up facing penalties or even prosecution. Should you decide to pay back tax and interest owed, there is an amnesty, but penalties will still be applied.
HMRC does offer support for landlords in tracking their rental income, to avoid getting caught out.
Can I buy a house and rent it out immediately?
Exactly how quickly you can rent out your property depends on the type of mortgage you have. If you have a residential mortgage, then your lender will be less likely to grant you permission to let out your home.
If you have a buy-to-let mortgage, you should check with your mortgage broker or lender to see the terms of your mortgage. This is where you will find out any terms or clauses revolving around renting out your property.
If you own the property outright then you are able to rent it out as soon as you wish as you will have no lender rules to abide by.
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