Income from lodgers.

jstitch

Hi,
My daughter currently has 2 lodgers and has to decide if she wants to use the 'Rent a Room' allowance (which she knows is rising next year) or have tax liability based on the profit she makes. We understand the principles of the two alternatives but to assess her profit we cannot find examples of what expenditure can be offset against the income from lodgers. For a non-resident landlord we understand that e.g. mortgage interest and an allowance for wear and tear on fittings is allowable but it is not clear to us whether a proportion or all of those costs and other costs e.g. utilities plus rent/service charge (it is a shared ownership flat) can all be counted as costs when she herself also lives in the flat.
If anyone can advise we would be very grateful.

booksurr

unless her costs are more than £7,500 per year there is no point in even thinking about it. RAR is best

- wear and tear allowance is abolished from next year
- mortgage interest, utilities, service charges, rent paid are all allowable costs but must be apportioned
- there is no proscribed method for apportioning costs between a resident LL and their lodger. You can base it on a "reasonable" method of your choice, HMRC may disagree if they ever check up: floor space, no of rooms, no of occupants etc (all discounting common areas)

also in case she had not yet found out, with 2 lodgers she is classed as running a lodging business so has lost her right to claim private residence relief when she sells the property and will therefore have to calculate her Capital Gains Tax liability. She will be able to claim letting relief so may not have any tax to pay, but she'll still have to do the calculation

jstitch

Thanks booksurr for all your advice, she lives in London so rental income is quite high. It's a 3 bed flat in which she lives with her partner and 2 lodgers. If you think it would be acceptable for her to claim 50% costs then it might be better for her to do it by assessing her profit and loss until the Rent a Room allowance is raised next year but from then on it's probably more favourable with Rent a Room. I think she thought it was more than 2 lodgers that made it change to a business but I will get her to double check.

booksurr

jstitch wrote: »

I think she thought it was more than 2 lodgers that made it change to a business but I will get her to double check.

save her the trouble, tell her to read this
http://www.hmrc.gov.uk/manuals/cgmanual/CG64702.htm

explain to her that "lives as a member of owner's family" means au pair or live in nanny, not a stranger who happens to rent a room