Capital gain tax because of lodgers?

Cat2011

I'm worried I may have to pay capital gains tax - can someone please help with the calculation...
I think I vaguely understand the capital gains calculation - but I don't understand the impact that having lodgers has.
I am planning on selling my property. Let's say I have owned it for 5 years. I have lived in it for 4 years, when I have had up to 3 lodgers living with me. I have fully let it for 1 year (with me living in another property that I purchased). And I will make a 70k gain (after buying and selling costs).

The HMRC website says that I can only claim PRR on the percentage of the property that I have lived in. As there was usually 3 lodgers, would that be 25% to me and 75% to the lodgers?

So PRR is 70k / 60mths * 48mths * 25% = 14k

Gain on let part of property is:
(70k / 60mths * 48mths * 75%) + (70k / 60mths * 12mths) = 56k

So letting relief is the lower of 40k OR 14k(PRR) OR 56K, so it is 14k.

Therefore gain minus PRR minus letting relief minus 11k allowance is 70-14-14-11=31k.

Do I pay 18% or 28% tax on the 31K. (That could be nearly 9k in tax?!)

Sorry for the long windedness.... I had previously assumed that because it was my main residence I wouldn't have to pay anything and am now panicking!

jimmo

You qualify for relief in respect of those parts of the house which you lived in but not for those parts that were exclusively used by your lodgers.
For example if it is a 3 bed roomed house you might say one bedroom for you and 2 for the lodgers plus 3 rooms (kitchen, lounge and dining room) shared.
In such a case you would qualify for relief on 4 rooms out of 6.
It may also be advisable to look at any periods when there were no lodgers and any periods when there was only 1.
http://www.hmrc.gov.uk/manuals/cgmanual/CG64702.htm

Cat2011

There are 4 bedrooms (3 let out), a spare room, a living room and a kitchen (do bathrooms count?). So I guess I live in 4/7 of the house, making the percentages 57% me: 43% let. If I put those percentages into the calculations then I suddenly don't owe any tax.... I worry that a little math is the difference between nothing or thousands owed...

booksurr

jimmo wrote: »

You qualify for relief in respect of those parts of the house which you lived in but not for those parts that were exclusively used by your lodgers.
For example if it is a 3 bed roomed house you might say one bedroom for you and 2 for the lodgers plus 3 rooms (kitchen, lounge and dining room) shared.
In such a case you would qualify for relief on 4 rooms out of 6.
It may also be advisable to look at any periods when there were no lodgers and any periods when there was only 1.
http://www.hmrc.gov.uk/manuals/cgmanual/CG64702.htm

can it be done on floorspace rather than room count? Also if a kitchen is counted then so too such a bathroom, at which point what about a toilet separate from a bathroom - that would be 2 rooms instead of one!

it seems unfair that someone who has made a kitchen diner out of a kitchen and a dining room "suffers" a 3/6th fraction rather than a 4/6th fraction using your example, whereas the available floorspace remains the same (or slightly increases due to wall removal!). Conversely of course in many instances the resident LL occupies the smallest bedroom and the lodgers occupy the larger rooms. So using bedroom floorspace may cancel out any fractional "gain" using downstairs floorspace in my example of a kitchen diner impact

is there anywhere on the CGT manual that sets out how to calculate? The link you provide confirms the more than 1 rule, but not how to actually do the calculation, I know the manual refers to % occupied but that is meaningless without defining "of what"?

HappyMJ

I don't understand. Lodgers do not have exclusive occupancy of any room. At least they shouldn't have. If there was no written agreement giving them exclusive access then it's implied they live in the house as a whole as part of the family (with the opportunity to) share meals and laundry and can also sleep overnight in a bedroom but the resident owner/occupier also has access to that room therefore not making it exclusive occupancy. So in my opinion the exemption continues to be valid as long as the owner was living in the house at the time.

I suppose the problem is taking in 3 lodgers and possibly putting locks on the rooms so it's more of a business ran for profit rather than just something done to help pay the household bills.

booksurr

HappyMJ wrote: »

I don't understand. Lodgers do not have exclusive occupancy of any room. At least they shouldn't have. If there was no written agreement giving them exclusive access then it's implied they live in the house as a whole as part of the family (with the opportunity to) share meals and laundry and can also sleep overnight in a bedroom but the resident owner/occupier also has access to that room therefore not making it exclusive occupancy. So in my opinion the exemption continues to be valid as long as the owner was living in the house at the time. HMRC will not accept your opinion

I suppose the problem is taking in 3 lodgers and possibly putting locks on the rooms so it's more of a business ran for profit rather than just something done to help pay the household bills.

not how HMRC or CGT legislation sees it.

If you have more than 1 lodger then you lose the right to total Private Residence Relief - a lodger is not defined in terms of housing law exclusivity of access or any other form of occupation rights. In tax a lodger is defined in the common sense - someone who pays rent to live there and so if you have more than 1 of them you lose some PRR but I do not know where the mechanics of how to calculate that are shown as the HMRC website I know of just talks about % of "lodging business" use

jimmo

booksurr wrote: »

can it be done on floorspace rather than room count?

Yes, of course it can. The law simply refers to “that part of the dwelling house” and, particularly since Self Assessment, it is up to the claimant to determine what that part is.
Historically these types of apportionment are done by reference to numbers of rooms but that has no more standing than the traditional method of time the apportionment by reference to months.
In my time I have seen
Apportionment by rooms and by floor area.
I have also seen time apportionment by months, fractions of months, weeks and days.
In normal circumstances HMRC would not challenge any of the above because of the method used but the classic exception was a pub.
http://www.hmrc.gov.uk/manuals/cgmanual/CG64674.htm
In the OP’s case, with a gross gain of £70,000, as long as he/she can demonstrate that less than half of the property was for the exclusive use of the lodgers the gain is going to be covered by Prr and lettings relief.
Trying to keep it simple there is no need to delve further.

jimmo

Cat2011 wrote: »

There are 4 bedrooms (3 let out), a spare room, a living room and a kitchen (do bathrooms count?). So I guess I live in 4/7 of the house, making the percentages 57% me: 43% let. If I put those percentages into the calculations then I suddenly don't owe any tax.... I worry that a little math is the difference between nothing or thousands owed...

Oops! Missed the bathroom. Sorry, but then again you may have come back and said you have an en-suite and the lodgers share the main bathroom.
Your original problem was assuming that 75% of the house would not qualify whereas 4/7ths or 5/8ths does. That not only increases the amount of relief in respect of your occupation. It also increases the amount of letting relief available.

booksurr

jimmo wrote: »

In normal circumstances HMRC would not challenge any of the above because of the method used but the classic exception was a pub.

that seems natural justice/ common sense since the 3 pub rooms would be considerably larger than 3 private rooms so that original calculation was always skewed to the point of nonsense
one assumes that the VAO valuation took account of the floorspace and the fact that commercial space should have a higher value than residential space, particularly in a space intensive usage such as a a pub, so again seems sensible rather than exceptional

I well remember a pub on the Brompton Rd whose rent was £65k pa in 1996 whereas the larger antiques shop next door paid £1.8k pa rent. The difference of course being down to the respective turnover difference and, in part, the value of the space in generating that turnover. Sadly the pub went bust within a few years

Cat2011

Thanks for the comments. It seems like looking at number of rooms in total would be beneficial. One issue is that during my self assessment tax returns I have been using 25%:75%, me:let, when considering how much of the bills etc. are attributable to tenants and deductible. I would assume if I start using 3/7:4/7 as the proportions instead, I will have to go back to HMRC and pay the extra on the income tax? Or can I change how I calculate the amount of house let, based on re-thinking it and not have to apply it to past tax returns....?

Cat2011

I found a help sheet that says

"The final 36 months of your period of ownership always qualify for relief,regardless of how you use the property in that time, as long as the dwelling house has been your only or main residence at some point. "


The 36mths is now 18, but looks like the fact that I've let out to 3 lodgers doesn't count for the last 18mths?