Tax implications of renting to multiple lodgers below market rate

Vigil

I'm in the process of a house purchase. When complete, I plan to live in the property myself and rent to 4 friends at 90% of market rate. Some of the intersections of tax law haven't been clarified by HMRC's website, so I have a few questions.

I know I can choose to use the Rent-A-Room scheme and have £7,500 of my rental income tax free. Alternatively, I can choose not to use the scheme and instead tax-deduct expenses incurred in the rental.

What are the meaningful differences (if any) in this situation between:
A) Do not charge lodgers for expenses (council tax + utilities)
Charge lodgers equally per person for expenses (so I would personally pay 20% of them). I am interested to know if there is any "special case" for this option given that it seems to be the usual one.
C) Charge lodgers all the expenses (so I pay none)

i.e. how do these options affect my ability to tax-deduct these expenses (if at all)?

As previously stated, because these are friends I do not plan to charge them the full market rate for rent. Does the 10% I'm not charging them constitute a "gift" for tax purposes? It seems absurd for HMRC to go around micromanaging rents (I'm sure many are out of date and thus "accidentally" below market rate). I know HMRC does take issue with this sort of thing when it comes to family though.
One article (gah, can't post links yet ) suggests their response might be to not allow me to deduct expenses beyond the rental income. Given how many people I'm going to be renting to I don't expect that to be a constraint - but I wonder whether they would have an alternate response if I eschewed expense-deducting and chose to use the Rent-a-Room scheme instead?

gazter

i think you will find you have HMO implications which are going to be substantially greater headache than HMRC.

PasturesNew

As has been said: HMO.

By having four friends in a house you will have a house with five "separate" people, sharing one house. This is House of Multiple Occupancy territory - and this varies from area to area. e.g. you might need a license, you might need to be an approved landlord.

There are building implications too, such as how many cookers and sinks you have in the kitchen, and how many loos. Etc.

HMO is your main potential headache.

And ... insuring this type of arrangement.

G_M

Whether you charge market rent or not is irrelevant. It's the income you receive that matters.

This will be an HMO. Check your local council for whether and how you have to register, and what facilities you have to provide.

Speak to an accountant re the specfic tax alternatives.

saajan_12

It doesn't really matter how you label the income / what you charge for ("90% of some arbitrary market rate or this is the rent figure, take it or leave it. Rent + some formula on bills or an all in number)

The point is your total income is X over a tax year.
*Option 1: If you are eligible for the rent a room scheme (e.g. provide furnished accomodation, share common areas) then deduct £7.5k and pay tax on the rest.
*Option 2: deduct expenses e.g. insurance, maintenance, repairs, bills. This can be the full cost if directly related to the rental only e.g. rent guarantee insurance or repairing lodger damage, or a fair proportion e.g. house gas bills. The proportion can be calculated e.g. by the number of people so 80% or by portion of the house they have primary use of etc.

ACG

G_M wrote: »

Whether you charge market rent or not is irrelevant. It's the income you receive that matters.

This is pretty important. The amount charged has no baring on anything - otherwise poundland would be...quids in - boom! I am available for functions and parties.

I would also look at whether you would be liable for CGT. That could be a nasty surprise in 5-10 years time.

Speak to an accountant. You are looking to run a business so get professional advice.

Vigil

@saajan_12 Ok, this is the aspect that wasn't obvious to me - so if I used the expense-deducting option then I would only be able to deduct expenses related to the lodgers' use (where e.g. proportional division would be a reasonable approximation). Good to know. Insurance is also listed as something deductible - would the insurance I could deduct just be the extra cost related to having the extra people?

On HMOs:

Government websites (still no links...) suggests I would only need a license if the HMO were a large HMO (it will not be). I was not aware of requirements to register etc. so I will check with the council, thanks.

Looking at the extra HMO-related responsibilities, most look like things I'd be doing anyway/have anyway, so not too much of a problem. Should check smoke alarms though.

I am aware of the CGT implications (renting out proportion of house amounts to losing the CGT exemption for that proportion over that time, minus some additional exemptions), so will not be surprised by that.

howisthisriskfree

What website says that about licencing?

Five unconnected people living in a house is a large HMO by council standards, I'd imagine all of them.

Vigil

@howisthisris gov.uk

The house doesn't meet 3-storey requirement for being a large HMO. I have had a look on my council's website and apparently that might be going away "soon(TM)" though...

G_M

Council's have discretion to introduce HMO licencing in other categories - you hve to check your own council's policy.

aneary

Slightly off topic but why does the amount of floors a property have make something a HMO or not?

Take a house with 3 floors and 5 bedrooms why would that be a HMO but a house with 2 floors and 5 bedrooms not be be one even if they have the same floor space? I understand that some councils have stricter rules and the number of floors doesn't come into it but I can't understand the govt. min standards being based on floors.