There is no specific restriction on renting to/from a relative. The only restriction is that a person cannot apply for Rent Supplement while living at home with his/her parents.
The general qualifying criteria for Rent Supplement must be met by the tenant (have rented for 6 months or be on the housing list, qualify on income grounds), the rent must be under the limit for family size and county, and the tenant must not be over-accomodated.
The tenancy must be bona fide - in terms of family renting, this means that the property must have been rented previously (i.e. this isn't a first tenancy), the tenant must have rented previously, and there must be a tenancy agreement/lease in place.
Before proceeding, I would ask the prospective tenant to check with the local authority whether renting from a family member will affect their status on the housing list (It shouldn't but it's best to double check prior to making any arrangements).