Allowable expenses 2nd property rental

MarkUK

Hello,

I'm employed by a company that is 100 miles away from my home. I work from home 2 days a week, and 3 days in the office, meaning that I stay in a hotel near the office for 2 nights. I'm looking to purchase a 2nd property, probably a 3 bedroom house, next to my office and rent out the spare rooms.

I know that I'm liable for extra stamp duty and I cannot use the rent a room allowance as this would not be my main house, however can I claim back expenses for the lodgers?

For example if I rent out both rooms for 11 months of the year, could I claim tax relief for the expenses I incur e.g. mortgage interest, telephone line, heating etc.?

If I could, how would it be apportioned?
1) Would it be using the percentage occupied by length occupied? 2/3 * (11/12)?
Example: £5000 expenses, of which I have relief of £3025 (5000 * 2/3 * (11/12) ) and pay tax on the remaining £1975?
Or
2) Time in house used by lodgers (I’m assuming my time in the house is irrelevant?)
Example: I stay in the house 100 days, while the lodgers stay 300 days each for the year. Therefore can I claim relief on the 600 days out of 1095 (3*365) days, circa 55%?
£5000 * 55% = £2740 tax relief and I would pay tax on the remaining £2260?
Or
3) No tax relief, I have to pay full tax on all income?

Any guidance would be very much appreciated, even if it is just towards a place/company that could provide advice?

Thank you,
Mark

00ec25

as you recognise, they are not lodgers, they are tenants, and you will be operating an HMO (Home in Multiple Occupation) where you as owner retain and do use the property but it is not your main home.

You can claim tax "relief" since you have a rental business that incurs costs and has income, so you are taxed on the profit.

Tax rules require that only the business element of the cost can be claimed, and where, as in your case, there is a personal use element of each cost you must exclude that personal element. There is no proscribed methodology, the requirement is that your calculation must be "reasonable"

option 1 is clearer for apportionment of certain costs. option 2 misses the point and would be very difficult to do correctly

The crucial bit that you seem to have missed is that any cost claimed must meet the "wholly and exclusively" test under which costs that are non business cannot be claimed. As you'd expect with tax there is some complexity in that "dual purpose expenditure" is recognised and a split between business and non business is allowed, but there is no comprehensive list of how to treat each expense. Instead, you need to apply the basic principle best summed up as "is the cost caused by having the tenants there or would I have had to pay it anyway", ie is it an additional cost: yes or no

taking your 3 specific costs you mention:
mortgage - dual purpose. You have exclusively let a certain proportion of the property, those 2 rooms let represent the business use. However, 2/3 is incorrect since the mortgage is for the whole property which includes common space used by all (kitchen, lounge etc) and thus not exclusively business. So your % should be of the total room count, not just bedrooms, eg: 2/5. The alternative is to do it by floor area let / total floor area. (hence why your option 2 is unworkable)

telephone line - fails the exclusively test. You would have a line in the house whether you have tenants or not. The whole line rental cost is non business, it cannot be apportioned. However, obviously assuming an itemised call cost bill, you can claim actual call costs made by the tenants, but that ought to effectively net to £0 anyway since the cost will be matched by the income you get from them towards that cost assuming you do sensibly make sure they pay their call costs

heating - dual purpose cost and can be apportioned since you incur additional cost heating the premises whilst they are there when you are not, and (in theory) when you are there, it is an additional cost to heat their rooms.

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2100

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2010

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2068

note council tax is a special case since it will be an HMO and therefore the liability falls on you as LL, not on them as tenants, as such you can claim it, but as dual purpose.

saajan_12

MarkUK wrote: »

Hello,

I'm employed by a company that is 100 miles away from my home. I work from home 2 days a week, and 3 days in the office, meaning that I stay in a hotel near the office for 2 nights. I'm looking to purchase a 2nd property, probably a 3 bedroom house, next to my office and rent out the spare rooms. - would you still 'work from home' in your initial home or switch that to the property near work? Do you have family in your initial home? If no to both, could you designate the property near work as your 'main property', letting rooms to lodgers and the inital home be a second property?

I know that I'm liable for extra stamp duty and I cannot use the rent a room allowance as this would not be my main house, however can I claim back expenses for the lodgers? - yes if you don't use the Rent a Room scheme.

For example if I rent out both rooms for 11 months of the year, could I claim tax relief for the expenses I incur e.g. mortgage interest, telephone line, heating etc.? - yes, for your increase in costs due to having lodgers

If I could, how would it be apportioned?
1) Would it be using the percentage occupied by length occupied? - length occupied as in total let length, regardless of whether they use the room for every hour they rent it. 2/3 * (11/12)?
Example: £5000 expenses, of which I have relief of £3025 (5000 * 2/3 * (11/12) ) and pay tax on the remaining £1975? broadly yes, but I'd look at each expense on a case by case basis.
Or
2) Time in house used by lodgers (I!!!8217;m assuming my time in the house is irrelevant?)
Example: I stay in the house 100 days, while the lodgers stay 300 days each for the year. Therefore can I claim relief on the 600 days out of 1095 (3*365) days, circa 55%?- this sounds arbitrary, if they have the use the space for 11 months, you can count expenses for that period, it would be impossible to measure the days they choose to not be present. Also, use of the space may not be equal, so looking at 1095 human days doesn't make sense. They don't have use of the whole property for 300 days, but their proportion ie their room (+ some shared areas maybe).
£5000 * 55% = £2740 tax relief and I would pay tax on the remaining £2260?
Or
3) No tax relief, I have to pay full tax on all income?

Any guidance would be very much appreciated, even if it is just towards a place/company that could provide advice?

Thank you,
Mark

I'd suggest No 1 based on # rooms or floor area of the tenants' rooms
-

AnotherJoe

A minor point but the telephone cant be claimed if you would have it anyway (for broadband I presume?) and letting the lodgers make calls on it could turn out to be a costly mess, would be better to have broadband only and everyone uses mobiles.

00ec25

saajan_12 wrote: »

If no to both, could you designate the property near work as your 'main property', letting rooms to lodgers and the inital home be a second property?

No, you cannot use the nomination of main residence for CGT purposes to designate a "main" home for the purposes of rent a room

"The main residence test for rent-a-room is a purely factual one: has the residence actually been the main residence at any time in the basis period? The judgement in Frost v Feltham [1980] 55TC10 gives some indication of the matters that are relevant in considering whether a property is a main residence."
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim4001