Rent a room - what part of income is taxable?

Spiritseeker

Hi all,

I've been letting 2 rooms since last September, and will need to work out my tax return soon for 2010-11. I’ve started pulling together information, but it certainly is not a simple task! I know I can either offset some expenses versus the income and be taxed on the ‘profit’ or I can apply the rent a room scheme.

Trying to work out which one to use is proving complicated in itself (does anyone else find the HMRC website atrocious with regards to being out of date legislation and sending you around in circles via links which ultimately bring you back to the 1st page you were looking at?!). Trying to establish whether or not I can deduct a portion of my mortgage interest – which at £800 a month is a sizeable amount! – is another story.

I let the 2 rooms at £525 and £575. I have advertised them as all bills included. If I were to apply the rent a room scheme, do I have to therefore do a simple calculation of (£525+£575)*7 (for simplicity’s sake 6th Sep – 6th Apr) = £7700. £7700 less the allowance of £4250 = £3450. This £3450 is the amount I am taxed on for 2010/11?
I arrived at £525 and £575 with bills included, with the figure in mind of around £75-£100 per lodger per month going towards bills. Obviously in winter months a higher proportion of my income goes on bills than in summer but on average they cost me that much extra per month in extra gas/elec/water/council tax etc.
So I suppose my question is that – does the rent a room calculation require the full amount received to be part of the calculation, or the perceived rental income amount after deducting a part for bills?

Logically I expect people to respond to say that the tax free part of £4250 is for just that – this should cover bills which it comfortably does if mortgage interest is not included. Factoring in mortgage interest though, this allowance does not cover that cost and I am back to the complicated task of working out if mortgage interest is claimable at all. Does anyone have any experience of successfully offsetting mortgage interest against rental income where the house is their main home? If so, were you successful, and what proportion did you apply? (If you use the number of rooms method – do you count a WC cubicle?).

Thanks so much for any advice in advance

Charlotte

chrismac1

Splitting the business element of mortgage interest - in fact this is quite common. For example, many people who run pubs or small hotels also live in the properties, so the proportion of the bills deemed to be for their private accommodation must be excluded from their accounts.

In these cases we can normally get to a figure which is less than the % you'd get to just by doing floor space. The correct figure is the % of the COST which is attributable to the use of the property. So to take the pub example, floor area is in my view justifiable on mortgage interest, but a lesser figure is justifiable for other costs such as electricity where there is no separate bill for the private area. Running pumps and cooking facilities clearly burns more electricity than just the usual household items.

As long as you acn justify whatever % you go with as being a "reasonable estimate" of the portion of the cost which is personal, then you at least have a position you can defend if HMRC ever suggest that a higher % should have been used.

antrobus

Spiritseeker wrote: »

So I suppose my question is that – does the rent a room calculation require the full amount received to be part of the calculation, or the perceived rental income amount after deducting a part for bills?

The principal point to bear in mind is that if you are in the Rent a Room scheme you can't claim any expenses relating to the letting

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_4017804

The way I've always understood it to work is that you have a choice between;

a) paying tax on your gross rental income in excess of £4,250 pa, or
b) paying tax on the whole of your net rental income net of expenses

You either opt into the Rent a Room scheme or you don't.

00ec25

as Antrobus says if you opt into the RaR scheme you cannot claim any expenses (deductions) at all

if you do not opt in, and therefore follow the "normal" method of rent minus expenses, then I cannot say for sure how you would treat the interest element of a residential mortgage (by definition it cannot be a BTL mortgage) but Chrismac's apportionment seems reasonable and is based on the application of the normal methid in all other circumstances

However, if you do apportion it as chrismac suggests then be careful because you will create a CGT liability on your main home as you would lose that % of the private residence relief since the property now comprises a private residence plus a rental business and the latter is therefore liable for CGT when you sell up. There is reference to this on helpsheet 283. Basic maths and a few guesses on future house prices will easily show whether any gain from Income Tax savings by claiming deductions is cancelled out by the extra payable in CGT

so much simpler just using rent a room and paying tax on the £3,450

Spiritseeker

Thanks all, I appreciate the info. Sometimes it helps just to have things confirmed, especially when you really want it to be a certain way!

A full year's rent is going to be £13,320 (smaller room I am now getting £535/month), and this takes me well into the higher tax rate band - particularly as that is being lowered to around £35k. I will seriously begrudge paying 40% tax on the £9070 income that is taxable! Particularly when the bills are so much higher due to having lodgers.

I will take a look at the blog and do my sums - the CGT thing is food for thought too. I am in London so my house shouldn't lose value but only gain.

thanks all!

chrismac1

CGT - can anyone name me one single case concerning CGT on rent a room? I am not aware of any, I suspect it could be a bit like the "don't use a room in your house 100% for business" stuff on the HMRC site. In other words, this may be what HMRC would like to happen but the Tribunals would not share their view.

Spiritseeker

That's a little more comforting - I'd be interested too if anyone else has been stung on teh CGT element.

Regarding the proportion of how much to charge - with the mortgage interest I feel like the only 'reasonable' allocation would be to work out the ratio of floor space/room numbers.

With bills though, I am very careful with not wasting electricity etc. My lodgers are not! So my bills should really only have been double to triple as much when my 2 lodgers moved in. I have the heating on appropriately - I don't freeze (but I do dress warmly if cold before putting the heating on) and I don't have it on to excess. having other people in the house obviously does not have the central heating on twice or 3 times - it would be on with me there anyway. So the fact that my gas bills have nearly quadrupled is crazy. Electricity - I never leave lights on when not in a room. One of my lodgers in particular always leaves her room light on, even when she goes out. I try and turn it off whenever I can but I'm not always there to do so. Speaking with her just doesn't change her ways unfortunately.
Anyway, my point is that if I were to use floor space, or the room method (I have 7 rooms: 3 bedrooms, 1 bathroom, 1 wc, 1 kitchen, 1 lounge) and only apportion 2/7 of the costs as deductible, I'd feel hard done by, as it should be more like 4 or 5 sevenths which is the increase.

As I have bills from the year I was in the hosue on my own, and the huge increase since my lodgers moved in, would that be a defensible enough position to allocate a higher proportion than 2 sevenths as an expense offsetting against my rental income?