rent a room scheme - charging rent inclusive or exclusive of bills

orcocan

Hi all,
I am looking to take in a lodger and I’m slightly confused as to how bills reimbursements are treated from a tax perspective, particularly if I opt in the rent a room scheme.
If the rent I charge does not include bills, I suppose I’d be paying tax on the rent, then ask the lodger to pay for half of the bills we need to pay and that's it. If I go above the threshold I'd be paying tax on the excess.
However if the rent I charge includes bills, can I explicitly split that amount into rent + bills so that I calculate my income excluding the bills (as if I was charging rent exclusive of bills)? Rent inclusive of bills will get me reaching the threshold a lot quicker.
Any advice?
Thanks!

G_M

Makes no difference.

The rent-a-room scheme is based on the total income received.

If you charge rent inclusive then that must be wihin the scheme limit.

If you charge rent exclusive, and then charge additional for utilities, the total of the two must be within the scheme limit.

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

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

See:

LodgerLandlord (21 tips from solicitor Tessa Shepperson + General information site)

Landlordzone (Various articles on taking in lodgers)

Renting out rooms in your home (Government info)

Rent a Room Scheme (HMRC guide for tax-free income from lodgers)

theartfullodger

G_M wrote: »

Makes no difference.

The rent-a-room scheme is based on the total income received.

If you charge rent inclusive then that must be wihin the scheme limit............

Errr not so, surely. If income above rent-a-room limit simply declare in self-assessment..

orcocan

yeah sorry that's incorrect, if it's beyond the threshold you pay tax on the excess, nowhere the law states the income must be within the threshold

I'm still confused as to why I'd have to pay tax on the portion of bills that the lodger is paying? If I charge exclusive of bills, then he pays say 20 quid on his share of the water bill, then I have to pay tax on that??

AndyTails

From advice my wife (tax accountant) gave to her brother: anything you charge as rent is income. So if you charge rent of £200 inclusive of bills, that is £200 of income as far as tax purposes go.


If you were to charge £180 for rent and £20 for bills, that would all be classed as income, because by fixing the amount for bills you are essentially charging rent inclusive of bills.


If you charge £180 for rent exclusive of bills, and then split bills equally, the only rental income for tax purposes is £180.

orcocan

thanks Andy

G_M

G_M wrote: »

Makes no difference.

The rent-a-room scheme is based on the total income received.

If you charge rent inclusive then that must be wihin the scheme limit.

If you charge rent exclusive, and then charge additional for utilities, the total of the two must be within the scheme limit.

OK - my comments were conditional on using the scheme. Obviously if the income exceeds the limits then you declare appropriately. But the OP's question seemed to focus on whether charging seperately for utilities would keep him within the limit and thus reduce his tax.

anselld

AndyTails wrote: »

If you charge £180 for rent exclusive of bills, and then split bills equally, the only rental income for tax purposes is £180.

That is incorrect. Lodger contribution to bills still counts as part of "gross receipts" for the purpose of RAR, see ...
https://www.gov.uk/government/publications/rent-a-room-for-traders-hs223-self-assessment-helpsheet/dgh

booksurr

orcocan wrote: »

I'm still confused as to why I'd have to pay tax on the portion of bills that the lodger is paying? If I charge exclusive of bills, then he pays say 20 quid on his share of the water bill, then I have to pay tax on that??

the rules are very clear. all money paid by the lodger to their LL counts towards the total to be declared

you are expressly NOT allowed to differentiate between "rent" and "bills" if you wish to use the rent a room allowance. Income is all to be classed as "rent"

if you think you will be better off by splitting bills then you are free not to use the RAR and instead use the normal method of rent - cost = taxable profit. RAR is available solely to allow people to avoid the admin required in keeping records. They are free to use it or not based on their own view of which is financially beneficial.

Yes you have to pay tax on the £20 because that is £20 less of your own money you have had to pay for the water bill. The whole point of RAR is if you choose to use it, you are not required to keep detailed records splitting each bill between personal and business use. Yes part or all of that £20 may well be additional to what you used to pay and so is entirely due to the lodgers use, but by choosing to use RAR you have decided to accept the trade off involved in being taxed on "bills", but not having to keep records and justify your split of bills if HMRC inspect you.

booksurr

AndyTails wrote: »

If you charge £180 for rent exclusive of bills, and then split bills equally, the only rental income for tax purposes is £180.

you must have misunderstood what your wife said because that is 100% wrong

saajan_12

The total of whatever you charge (rent + bills + household goods kitty+...) even if some of that money is in direct payment of specific bills.

It feels fairer if you think of it this way.. usually you pay tax on total income - expenses. The RAR makes the tax side easier and gives you a buffer by rounding your expenses up to the £7500 threshold. So, instead of calculating and subtracting actual expenses ('their' portion of bills, maintenance, etc), you can just subtract 7500.