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Taxes on rental income

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Hi folks,

I'm planning to rent out the two spare bedrooms in my three-bedroom house. I've been reading on taxes and I've done a bit of calculation based on my understanding. If anyone can help me check the numbers I'd be grateful! I'm taxed at 40% marginal through PAYE. I've never fill a tax return since this would be the first time I'd have a second income.

Assuming I'll get £1,050 for both rooms, inclusive of all bills, the annual rental income comes to £12,600. This is way above the Rent a Room allowance, so I guess I'll opt-out.

Mortgage interests are around £700 a month, but this is for the whole house. Council tax is £1,500 a year. Utility bills, say £100 a month. Together they make £11,100.

Based on the replies in another thread, I'm guessing I can claim 66% of the £11,100 as expenses because 2 out of 3 people living in the house are lodgers, plus the 10% maintenance on net rent. So claimable expenses are 11100*0.66 + 1260 = £8,586, and taxable income from the rent is 12600 - 8586 = £4,014. This would then be taxed at my marginal income tax rate. Is this correct?

Suppose I could only rent out the rooms for 6 months in a year, would I still be able to claim the 66% for the whole year if I make an effort to keep advertising on, say, spareroom.co.uk? Or only for the 6 months, bring the claimable expenses down to 8586 / 2 = £4,293?

Many thanks for your answers!

Comments

  • purdyoaten
    purdyoaten Posts: 1,159 Forumite
    edited 24 April 2014 at 8:29AM
    I cannot agree your logic. For example, you indicate that the mortgage interest is 'for the whole house' and this would obviously apply to rates also. These costs would be apportioned on the basis of the total rooms in the house, of which two are rented. You cannot claim, for example, mortgage interest on the kitchen 'element' of your house as you would be paying this regardless of whether or not you had lodgers.

    The costs are not proportioned in terms of lodgers - if you had only one lodger would you be claiming half of the costs?

    You are charging £1050 'inclusive of all bills'. What bills are those? Do they include the £100 utility bills which you have later apportioned?

    The 10% is, I presume. Wear and Tear allowance. This is calculated as 10% of gross rents after deducting 'charges normally borne by a landlord, such as council tax. In your case, this would appear to be £1080.

    The six month approach is grossly incorrect. Surely, your rental income is now £6300 less expenses as apportioned for the whole year? Let us assume that there are six rooms in the house excluding the bathrooms.

    Income £6300 less council tax £250 (£1500 *2/6 for a half year) less W & T less mortgage interest £1400 (£8400 *2/6 for a half year) etc etc.
    There are 10 types of people in the world - those who understand binary and those who do not. :doh:
  • rshi
    rshi Posts: 2 Newbie
    Thanks for the reply! I'm basing my 2/3 apportioning on the reply by 00ec25 in this thread:

    forums.moneysavingexpert.com/showthread.php?t=4944019 (Can't make a link because I'm new user...)
    you must apportion all costs - there is no set method for doing so but whatever you use must be reasonable. Basing it on people count is obviously the most advantageous to you, the other typical way is number of bedrooms, which may not work so well if its a 4 bed house!
    I don't know if this applies to me!

    The house is an average mid-terraced three bedroom, with two double rooms, a single room, and a bathroom on the first floor; a front room, and open plan kitchen-dining-living room on the ground floor. I've made the first floor single room a study (not shared), and the ground floor front room my bedroom, so the house still has three bedrooms.

    The six month approach was made up by myself. I vaguely remember reading somewhere that when calculating the period a rental business is run, whether you were advertising is one of the criteria. I couldn't find a source for that.

    The £1050 include the utility bills and council tax. Thanks for pointing out that W&T is on gross rents less bills.

    What do the 2 and 6 mean in (£1500 *2/6 for a half year)? Number of rooms rented and total number of rooms?
  • purdyoaten
    purdyoaten Posts: 1,159 Forumite
    edited 25 April 2014 at 7:30AM
    rshi wrote: »
    What do the 2 and 6 mean in (£1500 *2/6 for a half year)? Number of rooms rented and total number of rooms?

    2 rooms out of 6 are rented out. However, in your case, you would appear to have five rooms, plus a bathroom. As a guide, the fraction of rates, mortgage interest to be claimed is 2/5.

    00ec25 has provided a different method, as you say. In practice, I have never used this.
    There are 10 types of people in the world - those who understand binary and those who do not. :doh:
  • Aquamania
    Aquamania Posts: 2,112 Forumite
    rshi wrote: »
    ...Suppose I could only rent out the rooms for 6 months in a year, would I still be able to claim the 66% for the whole year if I make an effort to keep advertising on, say, spareroom.co.uk? Or only for the 6 months, bring the claimable expenses down to 8586 / 2 = £4,293?

    Many thanks for your answers!

    I'm no expert in this field, but if we just go on a 'reasonableness test' that you refer to later, I don't think this will pass.

    Let us take the example to the extreme.
    Say you were to get 6 people in for 1 overnight stay per year. Would you then think it reasonable to deduct 6/7 of the council tax (£1285 of £1500) from the rent received before subjecting the remainder, if any, to tax?

    I think you will have to apportion your costs appropriate to the period the tenant stays (pays rent).
    Afterall, if you live alone for 6 months of the year, you will be entitled to a 25% discount on the council tax, apportioned to the period the house is occupied only by you, anyway. :)
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