Business expense if you don’t charge a market rent?

Are you a landlord? Have you let out your property at an undervalue? If so, what business expense can you claim if you don’t charge a market rent?

As a landlord and a tax payer you want to maximise tax savings and claim all the possible expenses against your rents.


Why would you not charge market rent?


There are several reasons why property owners might decide to charge a rent below market value or even rent for free.


There are several business reasons why you may choose to charge lower than market rent.  You may find a good tenant who is willing to pay a year’s rent in advance and so offer a discount. Other examples covered in this huffington post article


It has also been common throughout the pandemic that many landlords reduced the rent charged. It may be the case that this will continue for a while due to the cost-of-living crisis.  You may take the view that it is better to get lower rent from a long-standing tenant rather than cause them hardship and risk a new tenancy.


However, this means that you as a landlord will have more limitations on what expenses you can claim.

What is a ‘market rent’?

Simply speaking this is what you as a landlord want to charge and potential tenants are prepared to pay for your property.

HM Revenue & Customs (HMRC) do not of course have the power to tell a landlord how much to charge for rent.


However, HMRC does have the power to ask for a written confirmation to assess market value rents (including from a third-party professional) if they believe you are not letting out at a commercial rate. The main purpose would be to restrict the amount of expenses you can claim.


As you can imagine a standard rent amount can easily be found on rental websites such as Zoopla and Rightmove. So HMRC do not really have to work very hard using their detective skills.


If you do not rent out your property at the going market rent, then you should be restricting the expenses you claim back.  Here we go through some of the scenarios that could apply to you and when you should really think about what expenses you are claiming back.

Ask yourself these questions:

  1. Wholly and exclusively rule

When determining which expenses you can deduct, it is important to first check if the expense is used wholly and exclusively for business purposes. If so, then it can likely be deducted from the rent you charge the tenant.


For an expense to be wholly or exclusively for the purposes of letting out a property it must be 100 per cent for that source of income.  An easy example is gas safety inspection for example.


However, if you rent a property for less than the market rate, you can only deduct expenses up to the value of the rent received.  In practice it means you cannot create a loss over the whole period.

  1. Dual-purpose expenditure

When renting out the property at a reduced rate and when expenses are not wholly and exclusively for business use, they cannot be deducted.


However, there are a few exceptions such as electricity, in which you can claim the business proportion of the expense.

  1. Rent free

It is very common, especially during Covid, for property owners to rent a room or property to relatives or tenants rent free.


In this case since there is no rent to offset the expenses, all expenses will be fully incurred by the landlord meaning again you cannot create a loss to be used against future profits.

  1. Relatives & friends

When you rent to relatives and friends, it is unlikely that the expenses of your property are incurred wholly and exclusively for business purposes. Unless of course you are renting out without any discount.


If you are operating “mates’ rates”, be warned you will not be able to claim the expenses against the rent received.  You will need to pay the tax on the rents received.


A relative or friend can ‘house sit’ your property between lettings as long as your property is available to let and you are actively seeking tenants. If you meet these conditions, you can deduct expenditure in the normal way.

  1. Timing of expenses

When a property is likely to be occupied rent free or at below-market rates, you should seek to incur expenses related to your property while it is being let at a market rate. This way you will protect yourself from losing out on any potential deductions.

But this is easily said than done.


As with all things tax it requires planning.


We are here to help so if you need help with this or any other areas of tax planning just get in touch.  Contact your normal manager or if you are not yet working with us have a look at  who we are