If you own a buy-to-let property, you may have considered letting it to family members or friends. While these arrangements can often be mutually beneficial, they can be more complex than renting to a tenant that you don’t have a relationship with. In this guide to renting to family and friends, we look at the upsides, the pitfalls, and the different legal, mortgage, and insurance implications you need to address to ensure any tenancy is a successful one.
- Can I rent my property to a family member?
- Are family members considered tenants?
- What defines a ‘lodger’?
- Can I let a family member live in my second home rent free?
- Should you rent to friends or family?
- What qualifies as a live-in landlord?
- What to consider when renting to a friend
- Do I need landlord insurance if I’m letting to family?
The short answer is yes. Acting as a landlord to family members is increasingly common in the UK. Usually, it’s the parent(s) who’s the landlord, and a child, perhaps with their partner, who is the tenant. While there are no recent figures on the number of parent landlords, a survey by the Post Office back in 2016 found that there were then 730,000 parent landlords in the UK – a number that has almost certainly increased since then.
Family members are considered tenants by mortgage lenders. If you intend to let your property to close family members, most mortgage providers will use different lending criteria, and you may need to apply for a ‘regulated buy-to-let mortgage’ which is specifically designed for renting to immediate family. This is because lenders see tenants who are close relatives as being a higher risk. There are good reasons for this. Lenders may be concerned that you’ll charge less than the market rent or worry that you’ll be reluctant to evict them if something goes wrong.
Consequently, you must tell your mortgage provider if you intend to let your property to your:
- Brother or sister
- Husband, wife, or civil partner
What about more distant family members?
Mortgage providers usually don’t apply special lending criteria if you rent to more distant family members. However, don’t assume this is always the case. If you plan to let your property to uncles, aunts, cousins, nephews, or nieces, always let your lender know.
If you are living in your main property and you simply want to let a room to a family member, they would be considered a lodger rather than a tenant. This normally has no implications for your residential mortgage and most lenders won’t require you to take out a buy-to-let mortgage instead. That said, always check with your mortgage provider first.
Can you add a family member to your tenancy?
Yes, you can normally add a family member to your tenancy as long as your landlord agrees. The exception would be when your flat or house is too small to legally allow another tenant.
Even if your landlord is also a family member, they should enter into a formal agreement with the new tenant. They can do so by either:
- Adding a new clause to your existing tenancy agreement
- Creating a new tenancy agreement, signed by you and the family member who is becoming the new tenant.
Remember the landlord will need to check the new tenant has the right to rent. They may also wish to undertake tenant referencing checks, especially if they want to qualify for rent guarantee insurance.
Can I rent my house to a family on benefits?
Yes, you can rent your property to a family member if they are in receipt of benefits (sometimes known as DSS tenants). However, councils will insist that the tenancy is a fully commercial arrangement if they are to pay housing benefit. This will normally require a tenancy agreement to be in place, and for your tenant to be paying rent (even if it is below the market rate). They will generally ask for details to support the claim.
Remember, there are exceptions. If a close relative lives in the same property as you as a lodger, they can’t claim housing benefit. Similarly, if your relative previously owned the property they are renting from you – or they are a former partner or spouse – councils will not normally pay housing benefit. If you are in receipt of benefits yourself, you should check if these will be affected by renting to a family member before agreeing to an arrangement.
If you own the second home outright, you can let a relative (or even a friend) live in it rent free. However, you must still comply with your responsibilities as a landlord.
If the property is mortgaged, your mortgage provider will almost certainly refuse to let anyone live in it rent free. Mortgages depend on affordability tests, generally requiring you take a monthly rent that covers at least 125% of your mortgage payment.
Also, think very carefully before letting anyone live in your property for free, or even for less than the market rent. You still have to keep the property maintained, ensure it complies with energy and safety regulations and periodically invest in new kitchens, bathrooms, and more. Would you be able to absorb these costs if you are not receiving any rent?
There are lots of different pros and cons to renting to friends or family. On the plus side, it can be satisfying to know that you are helping someone you care about. Also, because you have a pre-existing relationship, you’re more likely to trust them with the care of your property. This can be less hassle than going to the trouble of finding good tenants. You may even be tempted not to bother with tenant referencing. However, we recommend doing this as it may reveal previous tenancy problems and tenant referencing is also a pre-condition of rental guarantee insurance. Also, you are still legally obliged to conduct ‘right to rent’ checks, which can be done via a landlord checking service.
On the negative side, having a pre-existing relationship with your tenants can cause a variety of issues. You may find it harder to ask for rent increases. Your friend or family member may be tempted to pay the rent late because they think you ‘won’t mind’. If things do go wrong and you end up with difficult tenants, you may find it tricky to evict them; and if you do, it could impact your relationship for the long-term.
Renting to friends and family can also be bad for your property. Your tenants may feel reluctant to let you know when maintenance or repairs need doing. This can lead to more expensive repairs at a later date. At the other end of the scale, you may be expected to drop everything and sort out every minor problem instantly.
If you want to help out friends or family, sometimes the best solution is to offer them a room in your home. In this situation, you become a ‘live-in landlord’ and your friend or family member becomes a lodger. Becoming a live-in landlord is unlikely to have implications for your residential mortgage or insurance.
That said, it’s important to remember that you are not a live-in landlord if you split your home into purpose-built flats and you live in a separate one to your tenant. Also, if you’re not legally considered to be resident at the property you are not a live-in landlord. This would be the case if you let a room to a friend or family member in your holiday home. If you do this, you are considered a landlord and must comply with all the usual responsibilities and legal obligations. See this article to learn more about what qualifies as a live-in landlord.
If you are thinking of renting to a friend, the best approach is to follow the same procedures as you would with any other tenant. That means ensuring you have a tenancy agreement with them and that they understand their obligations, as well as yours. It also means taking a deposit and putting it in a deposit protection scheme. The more professional you can keep the landlord / tenant side of your relationship, the less likely it is to damage your friendship. You could also consider using a letting agency who would look after all the administrative aspects of the tenancy, keeping your relationship with the tenant completely separate, although they will take a cut of the rent for providing this service.
Is rental income from family or friends taxable?
If you receive any rental income from tenants who are family or friends, you must declare it via your Self-Assessment Tax Return. If you make any profit, you’ll need to pay income tax and national insurance on it. For more details, see our article How much tax do I need to pay on rental income?
The brief answer is yes, you do.
As well as building and contents insurance, a standard landlord insurance policy includes public and employers’ liability insurance. Remember, there will be visitors to the property, both friends and workmen, such as plumbers, electricians, etc, so you will need public liability insurance for these cases.
You should also consider adding rent guarantee insurance with landlord legal expenses cover to your policy. This provides protection if your tenant defaults on the rent and covers any associated legal costs, such as serving eviction notices.
Is it a legal requirement to have landlord insurance?
It’s not a legal requirement to have landlord insurance, although your mortgage lender will insist on you having insurance for the building at a minimum. You might think with family members you don’t need landlord insurance, but you could do. For instance, your child might be living in your property with a partner. Should the relationship end, it’s conceivable the partner may stay on in your property alone. In such a situation you would certainly want to have standard landlord insurance in place.
If you receive rent, even if it’s on an irregular, “what you can afford” basis, then you are still a landlord and you should have a simple contract written up and the correct insurance in place. You may be their relative, but you’re also their landlord, and having a tenancy agreement in place is beneficial for both you and them. It’s also important to remember that you must comply with your legal obligations as a landlord, and issue all of the relevant paperwork as you would for any other tenant.
To help make sure letting to family or friends goes as smoothly as possible, it’s wise to consult an independent insurance broker with plenty of experience in this field. Our team is able answer any questions you may have, help you understand the risks involved and advise on which policies can help protect you and your investment. To find out more, contact our team on 01603 216399.
This article is intended as a guide only. Please note that legislation does change, it is always best to check the most up to date guidance on gov.uk. Most landlord insurance policies arranged by Alan Boswell Group also have access to a legal advice helpline where policyholders can seek further advice. Please note Alan Boswell Group does not provide mortgage advice.