AIBU to worry my parents are undercharging rent on their flat?

My mum rents her house out for the same as local housing allowance because her tenant is on UC. I think its a nice thing.

The rate is below the Universal Credit threshold

I'm a landlord myself after I moved in with my DH and couldn't sell my flat at the time. I have been undercharging my tenants for years and the thing is, a good tenant that pays on time is A LOT more valuable than a couple of hundred extra per month from shitty tenants.

The approach I took was to let it out unfurnished, the flat didn't even have curtains. Tenants can do what they like, I only repair what I am legally obliged to repair. If the dishwasher breaks, it's their problem etc. I don't pay for decorating etc. This arrangement has worked for everyone, for years.

The biggest issue for your parents, that they may not fully understand, is that it is near impossible to kick someone out now. So they need to be prepared for the tenants to 1) not pay their rent and 2) still be in the property for a year or more before you can remove them.

£1650 a month isn't charity. Honestly the world is fucked if people think landlords 'only' charging 1650 a month are offering charity. These landlords don't have a mortgage to service presumably, you rrslise that insane 'market' rent charges are driven by BTL landlords with interest only mortgages pushing rents as high as they can get away with to maximise profit? If the OP's parents are happy with a marginally more modest rate of still very high rental income that is nobody else's business and it's not bloody charity FFS

It's too late. If they change any plans now I assume your mum's friend will react badly. But as pp said, they'll need to follow all the rules and pay tax, while being very unlikely to recover the property easily.

Essentially this is a very generous act of charity from them.

Have they registered as landlords, EPC rating C, EICR, Gas Safety, Legionella, Smoke/CO Alarms, PAT test, is the furniture fire retardant (newer furniture has this on the labels,) have they set up the deposit scheme, seen an accountant about income tax; being a landlord is not something to accidentally fall into as they could face fines. If it’s a favour then neither side are protected.

They sound lovely. It's rare, but not everyone is out to make as much as they can out of other people. As long as they're not leaving themselves without enough to live on, I'd be really proud.

Paid for by taxpayer how?

Sounds like a great deal for the new tenants .. all paid for by the taxpayer

Are they also prepared for what might happen if they come to a point where they do decide to sell it?

They could have an enormous challenge in ever getting them to leave so they can sell the place - and if similar-sized places are a lot more, they could end up refusing to leave citing nowhere else they can go; as well as the awkwardness in them being connected to (currently) friends. They could also slander them to everybody they all know for their 'callousness' in 'making 5 children homeless'.

Leave them alone, they don't want to make a big profit and they are hardly charging a peppercorn rent at 1650! They want to help a family afford a decent home, they are good people.

Do they realise they will pay income tax on the rent received? And capital gains tax when they sell either property?

If your parents have full capacity, then I don’t think you should interfere. Not everyone has the same values around money. You can disagree, and if they ask your opinion you should give it frankly, but otherwise I would let them make their own decisions.

How much are they getting in rent?