FTB Buying a four bed house renting out three of the rooms

jw30

I am considering buying a house which has previously been used as a rental house, he says the seller he gets £900pm for all the rooms let.

Now I have only ever rented or lived with my parents so If I do buy this place and rent the rooms out what are my legal requirements?

Do I have to inform the mortgage company, hmrc get landlord insurance etc etc?

I am self employed with my own limited company, but I get about £36k and only opened it as a LTD as it saved me 8k.

What would happen to my tax with this new income if i do indeed rent them out.

Also council tax and multiple occupancy where does this factor in?

00ec25

OK 2 important steps
- are you going to own the houyse yourself or is the compnay going to own it?
- are you going to live in it yourself while renting out the other 3 rooms, ie you will have lodgers in your own home not tenants in a rented property

answer those 2 and we can explain the consequences regarding the rest of your questions

jw30

I am aware if I buy it using my company is difficult so I guess I would buy it myself and live in it, while letting the remaining rooms as I am single and I would take the smallest room in order to maximise the income from the lodgers.

I understood you could earn up to £4000 without paying tax? has this amount changed?

mlz1413

I think any house with more than 3 seperate unrelated occupants is a HMO.

See this Landlord Zone link: http://www.landlordzone.co.uk/hmos.htm


Your can receive upto £4250 pa on the rent a room scheme, but there are certain conditions so please read up on this, also that is much less than the £900 pm or £10,800 pa you initally quoted.

getmore4less

I did see a link that said that 2 lodgers are exempt from HMO rules.

Mon-Fri lodgers may also get round the HMO rules since this is their secondary home.


On the tax front look at rent a room on HMRC

mlz1413

just a thought is the house over 3 floors?
if so I think the fire regulations are different.

jw30

mlz1413 wrote: »

I think any house with more than 3 seperate unrelated occupants is a HMO.

See this Landlord Zone link: http://www.landlordzone.co.uk/hmos.htm


Your can receive upto £4250 pa on the rent a room scheme, but there are certain conditions so please read up on this, also that is much less than the £900 pm or £10,800 pa you initally quoted.

I haven't bought it yet he told me how much he gets I was just questioning what tax free income I could have!

neas

4200 pound a year... google rent a room scheme.... Works out about 350 quid a month before tax.

But even if you got 700 quid a month... 350 would be exempt and you'd lose 20% of it or 40% depengin on your tax limits i guess.

mlz1413

if you use the rent a room scheme you can't claim expenses, so if you rent for over £350pm you will probably be better off not using the scheme.


The only Tax Free allowance you get is your personal allowance which is £6475 for year 2010/11, but as you fill in self assessement anyway this will come off your earning both employment and rental income

00ec25

1. for tax purposes you will be a resident LL in your main (or only) home. Therefore they will be lodgers. You must inform HMRC and will need to do an annual SA return, on which you can opt for either a) rent a room scheme or b) "normal" tax treatment

a) rent a room. any money you get in excess of 4,250 per year will be taxed at your marginal rate. You cannot deduct any expenses from this total and the total is just that, the total income, you cannot claim some is rent and some is contributuon to bills, you are taxed on the total you are paid by all your lodgers 900 x 12 = 10,800 -4,250 = 6,550 @20% = £1,310 in tax

b) normal rules means you can deduct costs from the income you receive, this could include utility bills but the cost of the bill would have to exclude your personal element, ie your own share as this is not a cost against your property letting business

The choice between a) or b) can be changed each tax year and is obviously based on whichever costs less tax. If you make a loss under option b) you cannot offset this against your other income, all you can do is carry it forward to next year

2. As lodgers you do not need to issue any formal agreement to them as they will not have any tenancy rights although it would be advisable to have something in writing especualliy regarding rent amount, due date and notice periods (legally there is no defined period but it has to be "reasonable")

3. as there will be at least 4 unconnected persons living in the same property then it is a HMO, no question. However, (and assuming the house does not have a habitable basement or 3rd floor room) it is not big enough to require mandatory licencing (which is a criminal offence). Nonethless you must contact your council because they may operate a discretionary (selective) scheme whereby they will require you to comply with aspects of building regulations, especially re fire precauctions & alarms. You will also need to check out what the council's interpreation of the planning permission laws after April 2010 will be - read this thread

4. as a resident LL with lodgers you do not legally have to have a LL gas safety certificate, an annual servicing will do. Similalry the inspection of electrics is the same as for a normal householder, ie you are advised to have it done every 5? years, but if you do not then there is no legal requirement to do so
However, you have a common law duty of care which means if anything goes wrong the fact you do did not have an annual servicing agreement or electrical inspection will count heavily against you

5. as a resident LL with lodgers you will need to inform your mortgage company and get permission to let. You will not need to change mortgage as you will still be under a residental mortgage

6. Insurance is down to whatever is the attitude of the company you approach. With that many lodgers some will require you to have full LL insurance, others may allow a lodger under the normal household policy. It really depends on them, just watch out that if they require a LL insurance then it may require you to issue a formal tenancy agreement, in which case you will need legal advice to get a house share agreement drawn up which does not grant exclusive use of a single room other wise the rent a room tax claim becomes more awkward

Fire_Fox

You won't inform the mortgage company you will need to ask, not all lenders will be happy to give you a loan on the basis you are letting rooms to cover the mortgage. I would suggest you need to see a mortgage broker, join a landlord's association and read the Inland Revenue website.