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HMRC do not have the power to tell a landlord how much to charge for the rental of their property. However, they can restrict the amount of expenses claimed against any rent that is paid.

HMRC take the view that 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’, which is required to arrive at rental business profits.

However, HMRC are prepared to allow expenses to be deducted up to the amount of rent received, thereby producing neither a profit nor a loss. Should there be any excess expenses they cannot be carried forward for deduction against rental income received in a later tax year. Losses incurred on such a property simply do not exist.

Properties let ‘rent free’ are regarded by HMRC as being tax neutral and outside the scope of the property income tax regime.

Example:
To ensure that the property does not lose its ‘business’ status it needs to remain available for commercial letting even if the property is being used ‘rent free’ for a time.

For example, a property will be able to retain its commercial status if an owner can prove that he is actively looking for tenants but has allowed the present tenants to reside ‘rent free’ whilst looking for replacement paying tenants.