Renting out a room in my home - contract / tax advice

noisla

I am about to start renting out a room in my house.

There are a couple of points on which I haven't been able to find answers on this forum or generally on the internet.

1) Contract - is there somewhere I can download a template to use? (I know a contract isn't strictly required, but I would feel happier with one.)

2) Tax - does payment for bills get included in the £4,260 Rent a Room scheme limit? The HMRC Manuals talk of "gross payments" and I assume (from general knowledge of Schedule A tax) that council tax would be included. However, I'm not sure about other bills (utilities, internet, etc). Also, would it make a difference whether the lodger pays me a lump sum towards bills, or I calculate an exact proportion of each bill?

3) Tax - if I do exceed the Rent a Room limit, you can opt to pay tax on your income calculated under normal Rental/SchA rules. To calculate expenses for this, would I just pro-rate bills e.g. 50:50 between me and the lodger (my bedroom is no bigger and no rooms reserved for my use only)? (This will help me calculate which method I should opt for.)

Many thanks!

Guest101

noisla wrote: »

I am about to start renting out a room in my house.

There are a couple of points on which I haven't been able to find answers on this forum or generally on the internet.

1) Contract - is there somewhere I can download a template to use? (I know a contract isn't strictly required, but I would feel happier with one.)

2) Tax - does payment for bills get included in the £4,260 Rent a Room scheme limit? The HMRC Manuals talk of "gross payments" and I assume (from general knowledge of Schedule A tax) that council tax would be included. However, I'm not sure about other bills (utilities, internet, etc). Also, would it make a difference whether the lodger pays me a lump sum towards bills, or I calculate an exact proportion of each bill?

3) Tax - if I do exceed the Rent a Room limit, you can opt to pay tax on your income calculated under normal Rental/SchA rules. To calculate expenses for this, would I just pro-rate bills e.g. 50:50 between me and the lodger (my bedroom is no bigger and no rooms reserved for my use only)? (This will help me calculate which method I should opt for.)

Many thanks!

1: A standard contract would simply say Landlord: your details, Lodger: their details, Pay X amount per week/month for rent and bills for a room at your address. Notice period is 2 weeks (for example). any rules etc you wish to impose should be noted to, and should in theory apply to both parties, but not always practicable.

2: yes all included. Just do a bills included rent, dont try to work out how much they use and u use, etc.

3: i dont believe this is possible, but someone may know better. as i suggest, do a rent including bills.

also remember its Per Year, you can have a lodger for 6 months, use the allowance and have it empty 6 months, thereby maximising your imcome to use ratio. IE 350 Per month vs 700 per month - still getting the same overall annual income, if you wish to pay no tax.

G_M

Keep the contract simple. Just the basics. But make sure the house rules are clear, either by discussing in detail or better still a separate document. Saves a lot of nastiness later when the girl/boyfiend stays over... and over....

LODGERS (Licencees/Excluded Occupiers)
A lodger (broadly) lives in the same property with their resident landlord, and shares facilities. Unlike tenants, lodgers have few rights.

The Housing Act 1988 provides definitions of 'Resident Landlord' and 'same property' (S31 & Schedule 1 (10).

There is advice for landlords considering taking in lodgers here:

LodgerLandlord (General information site)

Landlordzone (General advice on taking in lodgers)

Renting out rooms in your home (Government info)

Rent a Room Scheme (Government scheme for tax-free income from lodgers)

21 tips (Tessa Shepperson's Lodger Landlord website)

noisla

Guest101 wrote: »

also remember its Per Year, you can have a lodger for 6 months, use the allowance and have it empty 6 months, thereby maximising your imcome to use ratio. IE 350 Per month vs 700 per month - still getting the same overall annual income, if you wish to pay no tax.

Great idea, I hadn't through of that!

I find it disappointing that the Government has not increased the Rent a Room limit for inflation (it has remained unchanged for 10 years as far as I'm aware), and then they complain about the lack of housing stock!

G_M wrote: »

Keep the contract simple. Just the basics. But make sure the house rules are clear, either by discussing in detail or better still a separate document. Saves a lot of nastiness later when the girl/boyfiend stays over... and over....

LODGERS (Licencees/Excluded Occupiers)
A lodger (broadly) lives in the same property with their resident landlord, and shares facilities. Unlike tenants, lodgers have few rights.

The Housing Act 1988 provides definitions of 'Resident Landlord' and 'same property' (S31 & Schedule 1 (10).

There is advice for landlords considering taking in lodgers here:

LodgerLandlord (General information site)

Landlordzone (General advice on taking in lodgers)

Renting out rooms in your home (Government info)

Rent a Room Scheme (Government scheme for tax-free income from lodgers)

21 tips (Tessa Shepperson's Lodger Landlord website)

Many thanks for all those helpful links, just what I was looking for.

booksurr

noisla wrote: »

3) Tax - if I do exceed the Rent a Room limit, you can opt to pay tax on your income calculated under normal Rental/SchA rules. To calculate expenses for this, would I just pro-rate bills e.g. 50:50 between me and the lodger (my bedroom is no bigger and no rooms reserved for my use only)? (This will help me calculate which method I should opt for.)

that is called the "normal method"
however there is actually no set mechanism for apportioning bills, you can use what you regard as reasonable , provided of course you use it consistently

typically the alternative are:
a) by room count. The lodger has one room , you have use of all other rooms therefore in say a 3 bed house with lounge, kitchen and bathroom that means the fraction would be 1/6 and 5/6
b) by floor area, this allows for the lodger having a bigger room than yours
c) by person count

noisla

Sorry to raise an old point but reading back I am still not clear: The rent-a-room limit of £4,260 is about £350 a month. If I want to rent out my room, and the lodger's share of bills is say £100 a month, then I can charge £250 in rent only, in order to stay within the rent-a-room limit?

I have many friends who charge their lodgers £350 a month in rent plus X in bills, and think that exempts from from tax.

G_M

Correct. Tje £4260 limit is for all income you receive ie rent + bills.

If you wish to charge £100 pm for utilities, then you can charge up to £3060 pa in rent (or £255 pm).

HappyMJ

noisla wrote: »

Sorry to raise an old point but reading back I am still not clear: The rent-a-room limit of £4,260 is about £350 a month. If I want to rent out my room, and the lodger's share of bills is say £100 a month, then I can charge £250 in rent only, in order to stay within the rent-a-room limit?

I have many friends who charge their lodgers £350 a month in rent plus X in bills, and think that exempts from from tax.

It doesn't exempt them from tax but they may not have much of a profit anyway so not too much tax due.

You can calculate tax on gross profits if you wish. Then you can deduct mortgage interest, council tax, gas, electricity, water, tv licence, sky, landline, broadband, repainting, maintenance, insurance..etc from the rent received to reduce your gross profit and therefore the tax due.

The rent a room scheme is just there to avoid the hassle keeping receipts and keeping good records.

booksurr

noisla wrote: »

Sorry to raise an old point but reading back I am still not clear: The rent-a-room limit of £4,260 is about £350 a month. If I want to rent out my room, and the lodger's share of bills is say £100 a month, then I can charge £250 in rent only, in order to stay within the rent-a-room limit?

I have many friends who charge their lodgers £350 a month in rent plus X in bills, and think that exempts from from tax.

the rent a room allowance is £4,250 (£354.16 pcm)

if you charge the lodger £100 for bills and £250 rent and use the RAR scheme then that would be a gross receipts of £350pcm and so fall within the allowance assuming the lodger is there for the full 12 months. Obviously if lodger is there <12 mths then you are well below the limit since it is an annual figure as mentioned by Guest101 above

note the rule refers to receipts , not rent or bills or income - it is the gross amount of money paid to you or paid by the lodger for items you would otherwise have to pay for yourself. not sure why you remain unclear on this matter, its very straightforward. The lodger pays you rent = a receipt. The lodger pays a bill directly which you would have paid yourself (eg buys milk for general use) = receipt. The lodger gives you cash towards the electricity = receipt etc etc
http://www.hmrc.gov.uk/manuals/pimmanual/pim4001.htm


the RAR scheme is the total income you receive that includes "rent", "bills", contribution to the tea & milk "kitty", or all and any money the lodger pays for living there

as for your "friends" they are :
- either tax evading through ignorance or on purpose;
- or using the normal method to calculate their net profit after eligible costs

well done you for making sure you understand what you are doing !

noisla

Thanks to all the answers, particularly the Idiot's Guide from booksurr - genuinely helpful.

The only reason I thought to look into this is because I work in tax, so "gross receipts" piqued my interest, but I don't know which piece of legislation to read myself. The layman's guidance (from HMRC and .gov) is not at all clear or detailed enough.

The "Rent-a-room" terminology does sound a lot like it applies to "rent" for a "room" (when in fact it also applies to utilities, council tax, groceries... costs of the whole house). Further, bizarrely, .gov/HMRC etc make hardly any attempt to define "gross receipts". Finally, it is not intuitive that if you charge your lodger £50 for council tax, you pay £20 to HMRC and £50 to the council i.e. that you are taxed on paying council tax.

Example from .gov website:
"The Rent a Room Scheme lets you earn up to a threshold of £4,250 per year tax-free from letting out furnished accommodation in your home."
FALSE. Because you are even taxed if your lodger pays council tax directly to the council, or their share of the electricity bill to the utilities company.

Example from the HMRC Helpsheet 223:
"Rent-a-Room applies only to owner occupiers and tenants who receive rent from letting furnished accommodation in their only or main home."
FALSE. As it refers only to "rent".

Another example from the HMRC Helpsheet 223:
"If your gross receipts (before expenses and including any amounts received for meals, goods and services provided, such as cleaning or laundry) and any balancing charges do not exceed £4,250 you will be exempt from Income Tax on any profits made. "
MISLEADING, as it does not say that bills are included. I am not providing a "service" of council tax. Even utilities, they are being provided by the utility company not me (ok I might be an agent, but NOT a service provider, there is no value-add) - especially if the lodger pays the utility company directly.

So I can easily see how people could be fooled into thinking the scheme applies to "rent" only. It achieves the exact opposite of its stated aims: it is very complicated and a deterrent to renting out a spare room.

On a separate note, I don't want to volunteer myself for a business profits calculation as presumably that portion of my home would not qualify for PPR relief when I come to sell in the future.

Anyway, thanks again everybody.

booksurr

noisla wrote: »

On a separate note, I don't want to volunteer myself for a business profits calculation as presumably that portion of my home would not qualify for PPR relief when I come to sell in the future.

if you have one lodger then you retain PRR, - read HS283 http://search2.hmrc.gov.uk/kb5/hmrc/forms/view.page?record=zXscmgTSjJk&formid=3626 and http://www.hmrc.gov.uk/manuals/cgmanual/cg64702.htm

two or more lodgers then you lose it but can claim letting relief instead

noisla wrote: »

So I can easily see how people could be fooled into thinking the scheme applies to "rent" only. It achieves the exact opposite of its stated aims: it is very complicated and a deterrent to renting out a spare room

RAR is very simple and is the only place where you can get £4,250 pa tax free income without having to include it in your income tax personal allowance

whilst I agree with you that use of the word rent is misleading to a casual reader,reading all "rent a room" google hits soon shows plenty of cases on HMRC where gross receipts are shown and after all the point of self assessment is you are required to be a tax expert in order to correctly self assess (or use a tax expert to advise you!)
eg: http://www.hmrc.gov.uk/manuals/pimmanual/pim4030.htm

why do you think rent a room scheme exists ?
a lodger moves in, you receive money from them so your income increases, fact of life: income is taxable.

Yes that lodger may well lead to your bills increasing but you can choose to charge the lodger extra for the bills or you can choose to give an all inclusive "rent"

the whole point of RAR is that it gives you the option to choose between having to do detailed apportionment calculations to arrive at your net profit after expenses (method A) or the simpler flat rate tax free allowance (method where you don't have to do apportionment calculations and end up with £4,250 tax free. Yes you lose single person council tax discount, yes your utility bills increase, but all other costs are not a result of you having a lodger and you would have paid them yourself anyway (eg: food, mortgage etc) so the income from the lodger should leave you with a profit. Your choice of method A or method B then dictates how much of that is taxable.