Renting rooms to family and friends

TB26

After a long time looking, I have just finally found a property to buy which is perfect for me. I have a large deposit (280k) and a good income/credit history for the remaining amount (it is 425k) and am a first time buyer in my 40s. It is a leasehold 3 bed flat.

I would like to buy the flat and be able to to rent out two of the rooms (significantly below market rent) to my son and his partner (one room) and their friend (second room). I would have the third room. There wouldn't be any tenancy agreement or anything - and all of these people have lived with me before rent free. I have absolutely no qualms at all about doing this as I know them well, During the time they will be staying I was hoping to use whatever money from their rent to overpay the mortgage. They might only stay a few months, or a year - whatever suits is both really. This property will be my only residence, although I am currently staying with my mother as she isn't well.

The tax implications are not a problem in that I am perfectly happy to pay whatever tax is due on their rent and declare everything I need to. However the mortgage seems a problem. I initially wondered if a buy to let mortgage is the best, most open solution while I am staying with my mother. I could then perhaps switch to a different one when I move back. However it seems that can't have a buy to let mortgage as I am not already a homeowner. Nor can I return to live in it when my mums health has improved. Nor, the mortgage broker tells me, can I get a normal mortgage as I am not allowed then to let out to those three people.

I don't really know what to do? On the face of it, this doesn't seem such an overtly complex issue and it would solve my needs and my sons.

If anyone had any advice on the best solution, I would be extremely grateful. Many, many thanks.

HappyMJ

You can get a buy to let mortgage without owning a home already but you'll find it more difficult to get.

However, if you're living in the flat then a normal owner occupier mortgage will be fine. Your son can stay with you rent free as a guest. If he's a good son he'll help contribute to the bills at a fair rate. There is no need to declare this voluntary payment to anyone.

However the son's friend's rent will be on a more commercial basis as in you'll kick him out if he doesn't pay. You might find the rent is below the rent a room rate and there also isn't any requirement to declare anything. If it's over the rent a room rate then you just pay tax on the excess.

Personally, I wouldn't mention any of this arrangement to a lender and just get on with it. You do need to live in the property though on or soon after completion.

TB26

Thanks for such a quick reply. The three of them currently rent together, and have done for ages. It just seemed like a good idea in all ways - they got me as a landlady effectively, and I got a bit of extra money coming in, that I am happy to open with in terms of tax. At the moment, all three pay rent - as far as they are concerned, they are happy to continue with this. This would mean the rent comes in from two different people (with my son paying bills as you suggest), his girlfriend and friend paying a small separate rent. Is this ok? I am wondering if the fact that there are three if them (four of us in total) is OK? It would be over the rent a room rate in total with the two of them.

Pixie5740

If you're going to be living in the property then your son, his partner and the friend will be lodgers not tenants. You do not need a buy-to-let mortgage or apply for consent-to-let as you will be a resident landlord.

Check out the government's rent-a-room scheme to see what the tax implications might be.

If there are gas appliances in the property you will need a gas safety certificate. It's also worth checking with the local council whether or not this would be classified as a House in Multiple Occupation (HMO) as you could have 3 lodgers at any one time although since one would be your son this might not be applicable.

HappyMJ

TB26 wrote: »

Thanks for such a quick reply. The three of them currently rent together, and have done for ages. It just seemed like a good idea in all ways - they got me as a landlady effectively, and I got a bit of extra money coming in, that I am happy to open with in terms of tax. At the moment, all three pay rent - as far as they are concerned, they are happy to continue with this. This would mean the rent comes in from two different people (with my son paying bills as you suggest), his girlfriend and friend paying a small separate rent. Is this ok? I am wondering if the fact that there are three if them (four of us in total) is OK? It would be over the rent a room rate in total with the two of them.

If you are not interested in making profit then split all the bills council tax, gas, electric, water, phone and broadband, insurance etc including the interest only on the mortgage 4 ways. Don't split anything capital in nature though such as carpet, new kitchen etc... There is no need to declare anything to anyone in this case as you have no profit.

Kynthia

Your son and his girlfriend would be part of your household and what they pay would be considered contributing to the running costs of the home. There is no need to declare this income for tax purposes as far as I understand. Their friend however is not a member of your family/household. Therefore they would be a lodger and what they pay you is taxable income. If all they pay you, including bills, is below the rent a room scheme allowance then you do not need to declare it or pay tax on it.

booksurr

HappyMJ wrote: »

If you are not interested in making profit then split all the bills council tax, gas, electric, water, phone and broadband, insurance etc including the interest only on the mortgage 4 ways. Don't split anything capital in nature though such as carpet, new kitchen etc... There is no need to declare anything to anyone in this case as you have no profit.

not so there is very much a profit, The OP is only incurring 1/4 of the council tax rather than all of it - the third person is not related to the OP and therefore any payment they make, including sharing all and any bills, counts as the OP's income under the rent a room scheme. Money from the son& partner could be regarded as contribution to the single household expenses, money from unrelated third parties can't.

so IF the total is more than £4250 pa it must be declared under the RAR scheme and tax paid accordingly. Only if it is under 4250 total from both would it not need to be declared

Mojisola

booksurr wrote: »

partly correct - the son's partner and the third person are not related to the OP and therefore any payment they make, including sharing all and any bills, counts as the Op's income under the rent a room scheme. Money from the son could be regarded as contribution to the the household expenses, money from unrelated third parties can't.

If she was renting her own room,maybe, but as she is part of a couple, I don't think that's correct.

booksurr

Mojisola wrote: »

If she was renting her own room,maybe, but as she is part of a couple, I don't think that's correct.

which is why i was editing it as you posted !

snowscreamer

There is some confusion here. For tax purposes you can either use the rent-a-room scheme or offset your rental income against your costs. Use whichever leaves the least taxable income!!

Rent-a-room scheme
You receive the first £4250 tax-free and anything above that is taxable. You cannot offset any costs.

Rental income offset
You can offset costs against the rent received and then the remainder is all taxable.

So go for the rent-a-room scheme if you cannot find more than £4250 of costs, otherwise if you can find more than £4250 of costs (mortgage interest, utility bills, etc) then don't use the rent-a-room scheme.

More information here https://www.gov.uk/rent-room-in-your-home/rent-bills-and-tax

TB26

Thank you so much for all of your replies - it has certainly clarified everything. Particularly as my son and his partner would be considered as the same household. Sounds like the rent a room scheme for the unrelated individual will work fine for me. The mortgage company are also absolutely fine with me having them stay, so all is good!