Renting a room - tax implications

european_2

Hi,

Have just bought a house but will need to rent out 2 rooms in order to cover the mortgage costs/council taxes etc etc. It's in central london and will aim to rent the rooms at £800pcm incl all bills, so £19200 per annum total.

Am I able to offset the mortgage costs and or any other bills against this to reduce the tax liability? The house is a joint purchase between my brother and me. I am in the 40% tax bracket while my brother has no earnings, therefore has his full tax-free allowance available.

Thanks in advance for any help.

clutton_2

google Renta A Room - its a Tax concession for having a lodger - i cant recall the exact amount you can receive in rent before you are liable for tax. This will reduce your tax liability.

the simplest thing is just to ask the Tax man - they are very helpful

evoke

He's going to rent out two rooms - it's a business and the tax man will be very interested. I'm sure others will correct me if i'm wrong.

And it's a joint purchase with one person having no income and a requirement for rental income to meet mortgage repayments - a financial disaster waiting to happen, IMO.

HappyMJ

evoke wrote: »

He's going to rent out two rooms - it's a business and the tax man will be very interested. I'm sure others will correct me if i'm wrong.

And it's a joint purchase with one person having no income and a requirement for rental income to meet mortgage repayments - a financial disaster waiting to happen, IMO.

You can rent out as many rooms as you like. However, the annual limit is only £4,250 so the OP exceeds that by a long way.

The interest on the mortgage and other expenses can be offset against the income from the lodgers.

sunshinetours

As there are two of you and you jointly own you may wish to elect to let out one room each especially if one rent is higher than the other to benefit your brothers tax position

Basically you get a choice in that normally this would be taxed as any other normal rental business ie gross rents less expenses and pay tax on that BUT on rent a room's you can elect to simply pay tax on the excess of your rents over and above the £4250 basic limit each year (or £2125 each on your cases)

http://www.hmrc.gov.uk/manuals/pimmanual/PIM4030.htm

european_2

sunshinetours wrote: »

As there are two of you and you jointly own you may wish to elect to let out one room each especially if one rent is higher than the other to benefit your brothers tax position

Basically you get a choice in that normally this would be taxed as any other normal rental business ie gross rents less expenses and pay tax on that BUT on rent a room's you can elect to simply pay tax on the excess of your rents over and above the £4250 basic limit each year (or £2125 each on your cases)


Thanks sunshinetours. Looking at that website and direct.gov.uk, it looks like the second option would work better:


accountant's fees ----
buildings and contents insurance

---

we will have contents insurance.
interest on property loans

---

all the mortgage interest (£604.5 per month)
maintenance and repairs to the property (but not improvements)

---

£15000 initial repair costs likely here, averaging the 3 quotes we have had.
utility bills (like gas, water, electricity)

---

~£1000 per year?
rent, ground rent, service charges

---

£1500 service + £150 ground rent
Council Tax

---

£2000 p.a
services you pay for, like cleaning or gardening - £40/wk for a cleaner if we get one?
other direct costs of letting the property, like phone calls, stationery, advertising - probably £10pm.

All told - it looks like we can expense upwards of £12000. The rest can then be paid to my brother by the look of it to make use of the tax-free allowance. Hopefully this will be fine, but as was suggested above, will double check with the taxman.

As for the kind words about a financial disaster waiting to happen, our LTV is 25% and the mortgage borrowing % is less than our previous rental yield, so we're saving money (what we're all here to do!) even after costs. I should have said though, I'll be living in the property as well.

sunshinetours

european wrote: »

sunshinetours wrote: »

As there are two of you and you jointly own you may wish to elect to let out one room each especially if one rent is higher than the other to benefit your brothers tax position

Basically you get a choice in that normally this would be taxed as any other normal rental business ie gross rents less expenses and pay tax on that BUT on rent a room's you can elect to simply pay tax on the excess of your rents over and above the £4250 basic limit each year (or £2125 each on your cases)


Thanks sunshinetours. Looking at that website and direct.gov.uk, it looks like the second option would work better:


accountant's fees ----
buildings and contents insurance

---

we will have contents insurance.
interest on property loans

---

all the mortgage interest (£604.5 per month)
maintenance and repairs to the property (but not improvements)

---

£15000 initial repair costs likely here, averaging the 3 quotes we have had.
utility bills (like gas, water, electricity)

---

~£1000 per year?
rent, ground rent, service charges

---

£1500 service + £150 ground rent
Council Tax

---

£2000 p.a
services you pay for, like cleaning or gardening - £40/wk for a cleaner if we get one?
other direct costs of letting the property, like phone calls, stationery, advertising - probably £10pm.

All told - it looks like we can expense upwards of £12000. The rest can then be paid to my brother by the look of it to make use of the tax-free allowance. Hopefully this will be fine, but as was suggested above, will double check with the taxman.

As for the kind words about a financial disaster waiting to happen, our LTV is 25% and the mortgage borrowing % is less than our previous rental yield, so we're saving money (what we're all here to do!) even after costs. I should have said though, I'll be living in the property as well.

Without getting into detail on this you are unlikely to be able to allocate the remaining profit to your brother solely if the property is jointly owned. Do take advice on this early if that is your plan.
Also £15k on repairs is high - just ensure they qualify as repairs and not improvements

orangeslimes

The cost of furnishing the house might also be relevant - although a lot of that will be classed in a similar way to 'improvements'

You need to take proper professional advice (don't just phone up the tax man and assume they will tell you the right thing) and don't assume you can just assign all the profit to your brother as the last poster said.

00ec25

you say rent out 2 rooms -can you please confirm:
a) if both you and brother will be living in the property and therefore the 2 (addiitonal) occupants will be lodgers;
or
b) neither of you will be living in the property and so the occupants will be tenants

which one is it?

if answer a) then you will have to apportion each cost as part of it is your and your borther's personal expenditure from living in your own home, so for example you could only claim 50% (if jointly owned and occupied by both of you) of the mortgage and council tax to name but two of them

if answer b) then you are correct, although I too would find £15k on repairs excessive. The income must in principle be apportioned in accordance with ownership, so as said above, you cannot allocate all the net brother to brother only. There are ways to vary this but you would need professional advice to get it right ("beneficial interest")

orangeslimes wrote: »

The cost of furnishing the house might also be relevant - although a lot of that will be classed in a similar way to 'improvements'

NO - the cost of furnishing must be claimed either using the 10% wear and tear allowance or using the "renewals basis" ie. the net cost of the replacement item - you cannot claim for original cost and you cannot change the approach once you have selected it see here

european_2

00ec25 wrote: »

you say rent out 2 rooms -can you please confirm:
a) if both you and brother will be living in the property and therefore the 2 (addiitonal) occupants will be lodgers;
or
b) neither of you will be living in the property and so the occupants will be tenants

which one is it?

if answer a) then you will have to apportion each cost as part of it is your and your borther's personal expenditure from living in your own home, so for example you could only claim 50% (if jointly owned and occupied by both of you) of the mortgage and council tax to name but two of them

if answer b) then you are correct, although I too would find £15k on repairs excessive. The income must in principle be apportioned in accordance with ownership, so as said above, you cannot allocate all the net brother to brother only. There are ways to vary this but you would need professional advice to get it right ("beneficial interest")



NO - the cost of furnishing must be claimed either using the 10% wear and tear allowance or using the "renewals basis" ie. the net cost of the replacement item - you cannot claim for original cost and you cannot change the approach once you have selected it

Thank you for that - I hadn't realised there was a difference in tax terms. It's actually a mix of a & b. There are three rooms in the house. My brother will be living elsewhere for the first year, so it will be me and two others. From then on, it will be my brother and I, plus one other.

Therefore I think I am right in thinking I would only be able to claim 2/3rds of the non-personal expenditure. Clearly a tax minefield though, and surprisingly complex given the number of people that let a room in their home. I wonder how most people deal with it - i'm guessing they don't hire an accountant for advice.

Thank you to you all for your help.

Rov

Be careful to only include the interest part of the mortgage in the tax calculations, if its a repayment mortgage that's not deductable.

I think you've understood that, as I dont think you can get a repayment mortgage for a shed in central London for £604 pm