Mortgages, lodgers and tax

bodmil

Probably a very dumb question, but...

Is tax payable for income from rent after mortgages payments?

Ie, can I stuff my house full of lodgers, set their rent to cover the mortgage and bills and live the good life?

poppysarah

look up rent a room scheme.

bodmil

I have, I realise it's tax free up to £4k ish. But that won't cover my mortgage. A guy at work says he pays tax on rental income above his mortgage payments. I thought that you paid tax on all rental income above £4kish, regardless of whether you're using it to pay off the mortgage or not. But if I'm wrong I will get a 4-5 bed house and let 2-3 lodgers do the hard work for me.

Brallaqueen

More than 2 lodgers and you may get into HMO territory with certain safety requirements - my local council wants all 3 beds and up to have fire doors on every door, mains interlinked alarm system in every room, and fire blanket in the kitchen. They did want fire extinguishers, which cost a lot, then they decided they were a risk too... They don't subscribe to LACORS, and yours may not either.

You legally have to pax tax on any income over the rent a room scheme threshold 4,250- equates to approx £82 a week. It appears you can offset things against this, but I doubt your whole mortgage will be one of them

terryw

You will tax on any "profit" after deducting expenses from the rents received. Only the mortgage interest is allowable not the capital repayment.

No reason why your master-plan should not work providing that the figures work out!

You need to gen up on the duties/responsibilities of being a landlord even if they are in your own home.

PasturesNew

Up to £4k ish you don't pay tax under the Rent a Room scheme. This one off £4k/year is taken off the total lodger income, so if you have 100 lodgers each paying you £3k/year then the total is £300k and you'd pay tax on £296k.

Now, onto how many lodgers you can have. You'd need to look at HMO Regulations (which changed on 1 April 2010). Generally speaking, if you're living in the house you can't have more than two lodgers before your home, where you are living, is counted as an HMO. (I think it's 2, might be 3, check it with current regs)

Insurance companies aren't overkeen on lodgers. If you have 0 lodgers, anybody will insure you. If you have 1 lodger, some insurance companies will not want your business. If you have 2 lodgers, the pool of insurance companies prepared to insure your house becomes smaller....

bodmil

Ahhh I see, just the interest, thanks terryw. My plan is to start with 1 lodger and work up from there once it seems to be working. I can cover the mortgage plus overpayments myself... but I'd rather not!

bodmil

And I'll probably buy a house with an HMO licence in place as I'm looking at a lot of student houses so it could just be a case of updating/maintaining what's in place.

terryw

Obviously the total interest must be proportioned so that you are not claiming for your own costs of living there. Here's a link to the taxation of income from property.
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_10014027

terryw

PasturesNew wrote: »

Up to £4k ish you don't pay tax under the Rent a Room scheme. This one off £4k/year is taken off the total lodger income, so if you have 100 lodgers each paying you £3k/year then the total is £300k and you'd pay tax on £296k.

Well yes. But this is only the scenario if you decide to opt in to the rent a room scheme. The rent a room scheme is not a compulsory method of calculating tax. The normal method of calculating profit may well be more tax-efficient.

bodmil

Thanks Terry. I'm just deciding whether it's easier to buy a swanky 2 bed flat or a family house and get some money coming in. Sounds like it would be worth the effort in the long run.