Rent a Room Scheme - going over £7.5k

Type_45

Lover_of_Lycra said:

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.

Such as which things to consider?

oldbikebloke

Type_45 said:

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

I suggest you do some reading:
CG64702 - Capital Gains Manual - HMRC internal manual - GOV.UK (www.gov.uk)
in HMRC terms, >1 lodger means you are now running a "lettings business", not simply living in a home. In this CGT context HMRC call that "trading"  
CG64660 - Capital Gains Manual - HMRC internal manual - GOV.UK (www.gov.uk)
a claim for private residence relief can be made for the 1 year of solo occupation + final 9 months of ownership out of the total 11 years of ownership (1 year + 10 years later) so 1.75/11 = 15.9% of the gross gain 

the remainder of the gain arises "due to letting", however, only part of the property has been let, so the gain needs to split on an "accepted" method. The crudest one is let room count over total room count: 5 bedrooms, kitchen , sitting room, dining room = 8 rooms with 4 lodgers so 4/8 = 50% 
CG64663 - Capital Gains Manual - HMRC internal manual - GOV.UK (www.gov.uk)

In addition, because, and only because, this is lodger letting (not tenancies) you can still claim letting relief which can reduce the gross gain by a max of £40,000 

CG64710 - Capital Gains Manual - HMRC internal manual - GOV.UK (www.gov.uk)

Type_45

oldbikebloke said:

Type_45 said:

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

I suggest you do some reading:
CG64702 - Capital Gains Manual - HMRC internal manual - GOV.UK (www.gov.uk)
in HMRC terms, >1 lodger means you are now running a "lettings business", not simply living in a home. In this CGT context HMRC call that "trading"  
CG64660 - Capital Gains Manual - HMRC internal manual - GOV.UK (www.gov.uk)
a claim for private residence relief can be made for the 1 year of solo occupation + final 9 months of ownership out of the total 11 years of ownership (1 year + 10 years later) so 1.75/11 = 15.9% of the gross gain 

the remainder of the gain arises "due to letting", however, only part of the property has been let, so the gain needs to split on an "accepted" method. The crudest one is let room count over total room count: 5 bedrooms, kitchen , sitting room, dining room = 8 rooms with 4 lodgers so 4/8 = 50% 
CG64663 - Capital Gains Manual - HMRC internal manual - GOV.UK (www.gov.uk)

In addition, because, and only because, this is lodger letting (not tenancies) you can still claim letting relief which can reduce the gross gain by a max of £40,000 

CG64710 - Capital Gains Manual - HMRC internal manual - GOV.UK (www.gov.uk)

Thank you very much for that. That is very helpful indeed, and much appreciated.

So, to use the same figures I gave previously, would this calculation be correct?:

"Sharon" bought a 5 bed house for £250,000. She lived alone for 1 year, and then had 4 lodgers for 10 years. Sharon then sold the house after 11 years for £350,000.

15.9% of the £100k gain (£15,900) is covered by PRR and is exempt from tax (this covers the year she lived alone and then the allowance of her final 9 months at the house).

84.1% (£84,100) remains.

But only 50% of the rooms were let, so 42.05% of the 84.1% (£42,050) of the gain is taxable.

But there is an additional relief after this too, which is the lowest of:

- £40,000 (default relief)

- £42,050 (the 50% gain of the house Sharon didn't let)

- £42,050 (the 50% gain of the house Sharon let)

So it's £40,000 relief as that's the lowest.

Which leaves £2,050 as taxable at the CGT rate of 18% (basic rate tax payer) = £369 in CGT tax from the £100,000 equity gain.

Is that correct? 

Type_45

He's gone quiet.

oldbikebloke

Type_45 said:
Is that correct? 

correct 
although your rounding (84.1%) favours your version by £5 !

do bear in mind the 18% / 28% split is not simply is he a basic ratepayer? 
You add 2,050 to his taxable income to give "total income" and that may push some of the gain into the 28% rate (ie total income > £37,500)