Should my daughter pay me rent? My daughter has left her husband and is living in a second property owned by me, at which she has applied to be registered on the electoral roll. Her solicitor is advising her to pay me rent but it will be difficult for her to afford the market rent. I am unsure how best to proceed, both in terms of income tax liability and her divorce settlement. In relation to the latter, I assume it would be better that she pay the full market rent. This could be achieved by me gifting her £3,000 annually together with regular supplements from my surplus income, or by me lending her the money without specifying a firm date for repayment. In either event I assume there would be an income tax liability. If she paid a nominal rather than the market rent, or lived rent-free and paid only council tax and utility bills, would HM Revenue & Customs treat these arrangements as constituting potentially exempt transfers with no income tax implications, or would it charge income tax? Brian Williams, tax partner at accountants SRLV, asks why your daughter left the marital home? She may have prejudiced her claim against the property and made it easier for her husband to claim he needs to live there. If there were good reasons for leaving then it makes sense for her to pay you a full market rate for your second home. Although there is tax advantages and disadvantages in letting the property to your daughter. The disadvantage is that you will pay income tax on the rent, but you can offset expenses such as interest and travel costs against the income. Also, if you provide your daughter with the money for the rent you will effectively be paying tax on your money when it comes back to you. This strategy may also weaken her case for maintenance from the husband. Regular payments - if they are from post-tax income - will not be counted as gifts for inheritance tax (IHT) purposes. There is also the £3,000 annual exemption which should ensure there is no amount on which IHT might become payable. IHT will not be payable as long as you survive seven years after giving her the money. The tax advantage relates to capital gains tax (CGT). I assume that the second property is not your main home and therefore would not qualify automatically for principal private residence (PPR) relief. But you could elect for that property to be treated as though it were your PPR for a relatively short period, which would mean you could claim PPR for that period and for the past three years ownership of it. This would result in some or all of the gains being exempt from CGT. I hope you have made this election already or, if not, that you acquired the property recently as there is a time limit for making it. Additionally, when you sell the property you should be entitled to "lettings relief" meaning that up to £40,000 of the gain on disposal is free from CGT. HMRC sometimes investigates the circumstances where lettings relief is claimed and can be sceptical of claims where a property has been let to a relative. Where the letting is properly documented, any HMRC challenge would be easily rebuffed. There is no requirement for your daughter to pay the full market rent but it would be better for her to do so, both in terms of your tax position and her divorce settlement. Neither the FT nor the contributors accept liability for any direct or indirect loss arising from any reliance placed on replies