Q – I am letting a property to my niece at below market value rent, how are the expenses treated?
A – Expenses incurred on a property occupied rent free by, for example, a relative are likely to be incurred for personal or philanthropic purposes – to provide that person with a home. The same applies where the property is let at less than a commercial rate or isn’t let on commercial terms.
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 for business purposes. So, strictly, they can’t be deducted in arriving at rental business profits.
However, if a property is let below the market rate (as opposed to providing it rent-free), you can deduct the expenses of that property up to the rent received from it. This means that the uncommercially let property produces neither a profit nor a loss, but the excess expenses cannot be carried forward to be used in a later year.