Rent a Room Scheme - going over £7.5k

Type_45

Hi all,

A family member of mine has been renting out rooms in their house for a few years. They've been careful to keep below the £7.5k limit.

However, they say 2020/2021 will possibly end up being about £9,250.

Is the process of paying tax on this excess amount easy? Will it flag up the person for future years (ie, shall they ask lodgers to leave to save the hassle?) 
Do they need to speak to the tax man? Is the payment done via the HMRC app?

Or is it quite straightforward to pay for the year that it goes over, and then go seamlessly go back to keeping below £7.5k?

Also, the landlord only earns about £18k from their job. Any idea what the tax would be? 

Thank you in advance 🙂

Wanderingpomm

They’ll have to fill in a self assessment tax form 

PawelK

I'd imagine with £18k salary, they will be still within the basic rate tax threshold after utilising tax free amount of £12,500 so on top of the tax paid from the salary, the extra in a very basic scenario would be 20% of the excess of 7,500 tax free allowance hence £350. As per the previous reply, all declared on a self assessment form and paid to HMRC.

greatcrested

But yes, once you are on a self assessment tax return, HMRC will continue to require them for some years till it is obvious they are not relevant (ie rent is below the Scheme limit again and no other declations needed (capital gains, whatever)

AdrianC

Why would you turn down keeping 80% of the income over the threshold, in order to save a little bit of paperwork?
80% of £9,250-£7,500=£1,400 they'd be walking away from.

Self-assessment isn't that hard, unless your paperwork is an irredeemable mess.

macman

Seconded. Worst case, it's a day's work, to earn £1.4K. At £18K, he'd have to work an extra 5 weeks to earn that after tax...

Type_45

greatcrested said:

But yes, once you are on a self assessment tax return, HMRC will continue to require them for some years till it is obvious they are not relevant (ie rent is below the Scheme limit again and no other declations needed (capital gains, whatever)

Yes, I think that's the concern they have - making themselves known and opening themselves to being questioned in the future.

I think the rule is, however, that they will automatically go back to not having to declare as long as they stay under £7.5k without them having to do anything. So is this really a one off thing with no ongoing hassles as long as that happens? 

macman

You can simply declare to HMRC that you no longer need to continue in self assessment for future years.  It's not automatic de-registration : once you have submitted an s/a return, they will assume that you need to continue to do so unless told otherwise.

oldbikebloke

Type_45 said:

greatcrested said:

But yes, once you are on a self assessment tax return, HMRC will continue to require them for some years till it is obvious they are not relevant (ie rent is below the Scheme limit again and no other declations needed (capital gains, whatever)

Yes, I think that's the concern they have - making themselves known and opening themselves to being questioned in the future.

I think the rule is, however, that they will automatically go back to not having to declare as long as they stay under £7.5k without them having to do anything. So is this really a one off thing with no ongoing hassles as long as that happens? 

yes I rather suspected "they" were afraid to appear in public but are "they" willing to commit blatant tax evasion if "they" don't? 
Is it actually a single owner, or are "they" >1 person? ie is it in fact jointly owned? If yes, then the tax position is slightly different.

i will take as read that "they" are also unware that by having lodgers (plural) they have already lost part of the capital gains tax exemption when they come to sell the property in the future. Depending on the values obviously (and future changes in rates) they may have to pay CGT on a 5 of the gain in value of the property because as soon as you have >1 lodger that is the law 


so your question seems to boil down to the usual: will "they" be caught if "they" commit tax fraud, and no, once in SA you remain so until you actively tell HMRC you no longer need to and HMRC acknowledges in writing they accept that and stop sending notifications telling you to file a tax return 

Type_45

oldbikebloke said:

Type_45 said:

greatcrested said:

But yes, once you are on a self assessment tax return, HMRC will continue to require them for some years till it is obvious they are not relevant (ie rent is below the Scheme limit again and no other declations needed (capital gains, whatever)

Yes, I think that's the concern they have - making themselves known and opening themselves to being questioned in the future.

I think the rule is, however, that they will automatically go back to not having to declare as long as they stay under £7.5k without them having to do anything. So is this really a one off thing with no ongoing hassles as long as that happens? 

yes I rather suspected "they" were afraid to appear in public but are "they" willing to commit blatant tax evasion if "they" don't? 
Is it actually a single owner, or are "they" >1 person? ie is it in fact jointly owned? If yes, then the tax position is slightly different.

i will take as read that "they" are also unware that by having lodgers (plural) they have already lost part of the capital gains tax exemption when they come to sell the property in the future. Depending on the values obviously (and future changes in rates) they may have to pay CGT on a 5 of the gain in value of the property because as soon as you have >1 lodger that is the law 


so your question seems to boil down to the usual: will "they" be caught if "they" commit tax fraud, and no, once in SA you remain so until you actively tell HMRC you no longer need to and HMRC acknowledges in writing they accept that and stop sending notifications telling you to file a tax return 

The person who owns the house is a single person. Not a couple.

And it's not simply a choice of pay tax or evade it. They can evict tenants to keep below the threshold, which is legal.

Regarding the CGT, you are correct that they didn't know about this. If I give you an example, are you willing to give a tag packet guess as to the tax which would be owed and any other implications:

"Sharon" buys a 5 bedroom house for £250,000 in 2017. She lives in the property alone for a year, and then takes in more than one lodger at a time. She keeps below the £7,500 rent a room threshold.

Ten years later, Sharon wishes to sell the house. The house is now worth £300,000 (or even £350,000, as it been 10 years).

What would her CGT implications look like? Are there any other considerations for her to consider? 

Thank you.

[Deleted User]

Type_45 said:

oldbikebloke said:

Type_45 said:

greatcrested said:

But yes, once you are on a self assessment tax return, HMRC will continue to require them for some years till it is obvious they are not relevant (ie rent is below the Scheme limit again and no other declations needed (capital gains, whatever)

Yes, I think that's the concern they have - making themselves known and opening themselves to being questioned in the future.

I think the rule is, however, that they will automatically go back to not having to declare as long as they stay under £7.5k without them having to do anything. So is this really a one off thing with no ongoing hassles as long as that happens? 

yes I rather suspected "they" were afraid to appear in public but are "they" willing to commit blatant tax evasion if "they" don't? 
Is it actually a single owner, or are "they" >1 person? ie is it in fact jointly owned? If yes, then the tax position is slightly different.

i will take as read that "they" are also unware that by having lodgers (plural) they have already lost part of the capital gains tax exemption when they come to sell the property in the future. Depending on the values obviously (and future changes in rates) they may have to pay CGT on a 5 of the gain in value of the property because as soon as you have >1 lodger that is the law 


so your question seems to boil down to the usual: will "they" be caught if "they" commit tax fraud, and no, once in SA you remain so until you actively tell HMRC you no longer need to and HMRC acknowledges in writing they accept that and stop sending notifications telling you to file a tax return 

The person who owns the house is a single person. Not a couple.

And it's not simply a choice of pay tax or evade it. They can evict tenants to keep below the threshold, which is legal.

Regarding the CGT, you are correct that they didn't know about this. If I give you an example, are you willing to give a tag packet guess as to the tax which would be owed and any other implications:

"Sharon" buys a 5 bedroom house for £250,000 in 2017. She lives in the property alone for a year, and then takes in more than one lodger at a time. She keeps below the £7,500 rent a room threshold.

Ten years later, Sharon wishes to sell the house. The house is now worth £300,000 (or even £350,000, as it been 10 years).

What would her CGT implications look like? Are there any other considerations for her to consider? 

Thank you.

Tenants?  Surely these are lodgers in Sharon's house not tenants.  Yes Sharon could reduce the amount of rent she receives by evicting a lodger then she loses all that lodger's rent instead of just filling in a SA and paying a fraction of the rent lost in tax.  Hardly MSE. 

There are other things for Sharon to consider when determining her CGT liability.