Tax on rent-a-room scheme.

*Robin*

Asking on behalf of a friend:

History: My friend and her sister each own 50% of a house (don't know whether they are tenants in common or the other kind). Sister lives in the house and pays all bills (there is no mortgage). Friend has the use of a large barn and hard standing attached to the property. Neither pays rent to the other by agreement; both are happy that they derive an equal benefit from the property.

Last year they decided to rent out a bedroom under the rent-a-room scheme, with each sister taking 50% of the 'profit' (after deducting a share for utilities & CT as Sister lost her single person discount when the lodger moved in).

My friend - who is self employed - is now filling out her tax return, but is unsure whether she is supposed to declare the half share profit she got from the lodger, or should her Sister declare the full amount* as she lives in the house - in which case should Friend just declare her half under 'other income'? ..But then wouldn't they be paying tax twice on Friend's half of the profit?

* The room was rented for £450p.m., for about nine months, which may put it over the tax threshold for the scheme if Sister is supposed to declare the full amount (Friend told me Sister isn't too happy with that idea).

I haven't a clue so suggested she should call HMRC; she said she tried but they kept her queueing for so long that her mobile ran out of credit!

So in an attempt to avoid having to offer my land-line so she can try 'phoning again [which I'd end up paying for - quite a pricey call], I said I'd ask you wise people on here - any ideas please?

anselld

Only the sister is resident and can claim rent-a-room allowance up to a limit of 4250. So 450 for 9 months would be OK.
However if the income is split 50:50 it should be taxed as such. Sister can still claim full RAR allowance but friend can't. It would simply be taxed as property income.
Nobody pays tax twice, it is just due to personal circumstances one is taxed the other is not. Your friend has other tax benefits from being self employed which the sister does not.

*Robin*

anselld wrote: »

Only the sister is resident and can claim rent-a-room allowance up to a limit of 4250. So 450 for 9 months would be OK.
However if the income is split 50:50 it should be taxed as such. Sister can still claim full RAR allowance but friend can't. It would simply be taxed as property income.
Nobody pays tax twice, it is just due to personal circumstances one is taxed the other is not. Your friend has other tax benefits from being self employed which the sister does not.

Thanks for your reply, Anselld.

I'm struggling to understand what figure each sister should declare in this situation (forgot to tell you Sister is self-employed too, so will also have to fill out her tax return soon)?

katejo

If you use RAR, you are not allowed to offset any costs for heating, lighting etc. You are also not supposed to offset the loss of the single person council tax discount, a factor which I do find unfair. I don't charge my lodger a full 50% of the council tax, only the discount loss.

00ec25

your question comes down to 2 things:

1. how much cash did your friend physically receive?

2. friend does not live there so cannot use the RAR scheme, but are any of the bills actually in her name?


Friend
must declare the cash she actually received. Anything else would be tax evasion and illegal.

She must declare this under the property related income pages, she cannot declare this as "other income". That is clearly explained on the SA guidance notes.

although related, her and her sister are not a married couple (!) so tax law says that the split of the income between the 2 of them is down to whatever they decide, it does not have to be 50/50 and does not have to mirror their respective ownership portions. BUT as it appears the income has already been split then its too late to change what is in friend's bank account and therefore what she must declare as her income - anything else would be tax evasion

therefore friend will end up paying tax on her share as she has property income and no allowances or costs to deduct from it to reduce the net profit that is subject to tax

sister
can use the RAR scheme
should declare whatever cash is actually left after having paid out the agreed "share" to her sister (your friend) but BEFORE deducting any of her own costs

I am concerned about the phrase "after deducting a share for utilities & CT". Under RAR the sister cannot deduct any costs so she would have to declare the full amount she is left with and claim tax free status under RAR

As an example lets put some numbers in:

total rent 450x9 = 4050

friend gets an amount after sister has deducted utilities and CT (lets guess that came to 750) so 4050 -750 = 3300 / 2 = 1650

friend declares 1,650 rental income on her SA using the property related pages. She has no allowable costs so must pay tax on that 1,650 as that is how much cash she physically received

sister on the other hand can use RAR but cannot deduct any costs so her share is simply 4050 - 1650 = 2400 as that's how much of the gross income she is accountable for
She declares 2,400 on the property related pages, ticks the box claiming the RAR and therefore does not pay any tax at all as her share comes within the RAR limit.

sister therefore ends up with 2400 -750 paid out on bills = 1650 and keeps this tax free, on the otehr hand friend receives 1650 but loses some of that in tax so at the end of the day gets slightly less than her own sister once tax is accounted for

*Robin*

00ec25 wrote: »

your question comes down to 2 things:

1. how much cash did your friend physically receive?

2. friend does not live there so cannot use the RAR scheme, but are any of the bills actually in her name?


Friend
must declare the cash she actually received. Anything else would be tax evasion and illegal.

She must declare this under the property related income pages, she cannot declare this as "other income". That is clearly explained on the SA guidance notes.

although related, her and her sister are not a married couple (!) so tax law says that the split of the income between the 2 of them is down to whatever they decide, it does not have to be 50/50 and does not have to mirror their respective ownership portions. BUT as it appears the income has already been split then its too late to change what is in friend's bank account and therefore what she must declare as her income - anything else would be tax evasion

therefore friend will end up paying tax on her share as she has property income and no allowances or costs to deduct from it to reduce the net profit that is subject to tax

sister
can use the RAR scheme
should declare whatever cash is actually left after having paid out the agreed "share" to her sister (your friend) but BEFORE deducting any of her own costs

I am concerned about the phrase "after deducting a share for utilities & CT". Under RAR the sister cannot deduct any costs so she would have to declare the full amount she is left with and claim tax free status under RAR

As an example lets put some numbers in:

total rent 450x9 = 4050

friend gets an amount after sister has deducted utilities and CT (lets guess that came to 750) so 4050 -750 = 3300 / 2 = 1650

friend declares 1,650 rental income on her SA using the property related pages. She has no allowable costs so must pay tax on that 1,650 as that is how much cash she physically received

sister on the other hand can use RAR but cannot deduct any costs so her share is simply 4050 - 1650 = 2400 as that's how much of the gross income she is accountable for
She declares 2,400 on the property related pages, ticks the box claiming the RAR and therefore does not pay any tax at all as her share comes within the RAR limit.

sister therefore ends up with 2400 -750 paid out on bills = 1650 and keeps this tax free, on the otehr hand friend receives 1650 but loses some of that in tax so at the end of the day gets slightly less than her own sister once tax is accounted for

Thank you very much indeed, Katejo and 00ec25! :T :T

00ec25: Q1: I'm not sure of the exact amount Friend received over the nine months.
Q2: Am pretty sure all the utilities are in Sister's name.

With your example my friend should be able to work out what she needs to declare in order to stay in HMRC's good books. I've printed out your post to give to her.

Sister is likely to be annoyed to hear that she shouldn't have deducted any costs, before giving Friend a share of the money coming in - am going to stay well away from that discussion!

anselld

*Robin* wrote: »

Sister is likely to be annoyed to hear that she shouldn't have deducted any costs, before giving Friend a share of the money coming in - am going to stay well away from that discussion!

To be clear, it is not a question of deduction before sharing, they can do whatever is agreed between them. It is just that any deduction is not a legitimate expense for tax purposes if RAR is claimed and must therefore be added back prior to declaring on the tax return.

00ec25

*Robin* wrote: »

Sister is likely to be annoyed to hear that she shouldn't have deducted any costs, before giving Friend a share of the money coming in - am going to stay well away from that discussion!

actually the way she did it is by far the best
the sister lives in it, she , and only she, is liable for utility bills and CT therefore it is right that she takes a cut from the rent to cover them before the balance is split between her and your friend

your friend does not incur any costs in operating this rental "business" so it is only fair that she should get the income after her sister's costs have been covered

just to reiterate, please remember knocking off the costs before splitting the money between friend and sister has nothing at all to do with the tax .
Sister cannot deduct costs from the figure she declares on her tax return if using the RAR scheme
Friend has no liability for the bills so also cannot claim them against her tax