Renting out a 'granny flat'

the_flying_pig

Hello

I wondered if anyone might be able to advise on the following.

Imagine that I buy a BTL flat for £100k. Assuming no deposit and a 5% interest rate I pay £5k a year in interest. So as a 'business' I break even [I have no other costs]. So I pay no tax, right?

But I'm looking at a more complex situation. I buy a big 4-storey house [all numbers here are illustrative] for £400k, with a 50% LTV mortgage/£200k deposit [so, assuming interest only, a yearly interest bill of about £10k a year]. The bottom floor of this house is all set up like a little granny [studio] flat, with a kitchen and whatnot. I decide that I want to let it out, at least for the first few years, because right now I need the extra money more than I need the extra space. It'll earn £5k a year in rent.

My question - who decides how much interest is tax deductible against my £5k a year rent? I'm paying £10k a year in total but really only about a quarter at most of that [in theory - the house has 4 floors] has anything to do with the granny flat, right? But surely at least some of it's tax deductible?

As an aside, presumably renovations that are specific to the granny flat are tax deductible?

Cheers

G_M

Rent it out for £4250 a year instead. It'll be tax free income.

Oh, and save yourself some interest by getting residential, not BTL, mortgage. Cheaper.

dslator

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

It's the Rent a Room Scheme.

the_flying_pig

G_M wrote: »

Rent it out for £4250 a year instead. It'll be tax free income.

Oh, and save yourself some interest by getting residential, not BTL, mortgage. Cheaper.

Thanks for the reply but It looks like my illustrative figures were flawed in practice. This is actually in a decent part of London so I'd hope to get the best part of £10k a year for it. Also I will need to spend a fair bit on improvements up front.

MoneyJuggler

As I understand it the rent a room scheme only applies if the room is part of the house, not separate , so there needs to be shared use of (for example) bathroom etc (I think)

Mojisola

MoneyJuggler wrote: »

As I understand it the rent a room scheme only applies if the room is part of the house, not separate , so there needs to be shared use of (for example) bathroom etc (I think)

That's right.

"Who can take advantage of the scheme?
You can choose to take advantage of the scheme if you let furnished accommodation in your only or family home to a lodger. Your only or family home is the one where you/your family live for most of the time. A lodger is someone who pays to live in your home, sometimes with meals provided, and who often shares the family rooms.
A lodger can occupy a single room or an entire floor of your home. However, the scheme does not apply if your home is converted into separate flats that you rent out. In this case you will need to declare your rental income to HM Revenue & Customs (HMRC) and pay tax in the normal way. Nor does the scheme apply if you let unfurnished accommodation in your home."

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

theartfullodger

the_flying_pig wrote: »

.... ...........

My question - who decides how much interest is tax deductible against my £5k a year rent? I...........

Well, you fill in the property pages of your HMRC self assessment honestly (as do all good landlords..) with relevant expenses (insurance, stationery, office space [I put down £2 a week], mortgage interest etc etc etc..) and send it off/enter it online...

But you make sure you've kept good clear records, receipts, invoices, etc etc etc etc... in case HMRC ever come looking (they can, they do, no reason needed..) so you ensure you've done it right....

In your shoes I'd ask a couple of estate agents round to quote, ideally in writing/email, the sale value of "granny flat" & "rest of house" then apply total interest on't mortgage in that same proportion. Dunno if that's acceptable..

If you are nervous why not 'phone that nice tax man up & ask his advice?? You've clearly nothing to hide...

Oh, and gas safety cert, write to insurers etc etc etc...

btw as you'll be living in the building - although the granny flat is I assume separate - you can evict occupier quicker than with a normal, purpose-built-flat AST.

But I'm confused - your original post says £5k rent but later that you expect £10k... is this a for-real plan or R U a troll ??

Cheers!

the_flying_pig

theartfullodger wrote: »

Well, you fill in the property pages of your HMRC self assessment honestly (as do all good landlords..) with relevant expenses (insurance, stationery, office space [I put down £2 a week], mortgage interest etc etc etc..) and send it off/enter it online...

But you make sure you've kept good clear records, receipts, invoices, etc etc etc etc... in case HMRC ever come looking (they can, they do, no reason needed..) so you ensure you've done it right....

In your shoes I'd ask a couple of estate agents round to quote, ideally in writing/email, the sale value of "granny flat" & "rest of house" then apply total interest on't mortgage in that same proportion. Dunno if that's acceptable..

If you are nervous why not 'phone that nice tax man up & ask his advice?? You've clearly nothing to hide...

Oh, and gas safety cert, write to insurers etc etc etc...

btw as you'll be living in the building - although the granny flat is I assume separate - you can evict occupier quicker than with a normal, purpose-built-flat AST.

But I'm confused - your original post says £5k rent but later that you expect £10k... is this a for-real plan or R U a troll ??

Cheers!

Thanks, that's really useful.

I am absolutely not "troll"-ing. What gratification could I get from asking for obscure letting advice? I was just trying to keep the numbers very simple, i.e. starting with a £100k property value and 5% rental yield/interest rates. Also maybe I didn't want to lay bare the precise details of my finances.

My questions are maybe a bit ignorant because I've never attempted anything at all like this before. So is it really possible to call the taxman and get advice on your specific situation? What government department is that?

The flat right now has a seperate entrance that's mostly disused, if I let it out I'd spend some money getting that up to scratch.

Yorkie1

If it's a completely separate granny flat - i.e. kitchen, bathroom, entrance - you might want to double check whether it needs to be counted separately for council tax purposes.

theartfullodger

the_flying_pig wrote: »

........ So is it really possible to call the taxman and get advice on your specific situation? What government department is that?

........

HMRC: Call the tax office mentioned on your tax return (or maybe P45 or payslip..). I'd suggest only doing so after reading guidance on HMRC
website
http://www.hmrc.gov.uk/manuals/pimmanual/index.htm
and with a very specific example .. they ain't a free consultancy operation, we pay for them...

the_flying_pig

theartfullodger wrote: »

HMRC: Call the tax office mentioned on your tax return (or maybe P45 or payslip..). I'd suggest only doing so after reading guidance on HMRC
website
http://www.hmrc.gov.uk/manuals/pimmanual/index.htm
and with a very specific example .. they ain't a free consultancy operation, we pay for them...

OK, thanks again. That looks like enough to be going on with.