Tax question - rent-a-room scheme in london

[paulmnz]

So, I'm going to get a lodger in central London, my rental income will be approximately £12k a year. The means I'm well over the £4250 tax-free threshold.

I'm a higher-rate tax payer, so earnings over the £4250 will be taxed at 40%.

It seems to me that I should opt to pay tax on the lot and claim expenses against the let rather than opting into the rent-a-room scheme.

My question is, which of the following can I claim and what proportion (it's a 2 bedroom flat with myself and potentially one lodger, so I'm assuming 50%?)

- Mortgage / lending (interest costs only)
- electricity
- building cost (block of flats with a yearly standing charge)
- ground rent
- telephone and internet
- tv license
- council tax
- 10% of the rental charge for depreciation of furniture

That lot adds up to ~£19k a year in total, so I'm expecting £8.5k would be considered expenses against the lodger income?

This would mean I would pay 40% on the nett income of £3500. If I opted into the rent-a-room scheme I would pay 40% on £7750?

I understand that as I am renting a single room I am still subject to capital gains relief if I sell the flat - correct?

I plan to seek some independent tax advice, but does this seem broadly correct? anything I've missed which I can also claim against the lodger income?

Thanks.

[Eric Mc]

I would suggest that a 50:50 split would not be correct.

How many rooms are there in the flat i.e bedrooms, living rooms, kitchens, hallways, loos etc?
Alternatively, what is the floor area of the bedroom used by the lodger?

HMRC do not set out specifically how household costs should be split except to sate that a "fair and equitable" method should be used.

[eldar]

Read this. It explains the rules fairly comprehensively, I think.

http://www.hmrc.gov.uk/manuals/pimmanual/pim4001.h...

[paulmnz]

Eric Mc said:

I would suggest that a 50:50 split would not be correct.

How many rooms are there in the flat i.e bedrooms, living rooms, kitchens, hallways, loos etc?
Alternatively, what is the floor area of the bedroom used by the lodger?

HMRC do not set out specifically how household costs should be split except to sate that a "fair and equitable" method should be used.

It's a central london flat, so it's tiny as you can imagine

there are two bedrooms, the lodger has the larger of the two. one bathroom, lounge/kitchen area and a single hallway - all would be shared between us (as they are a lodger and not a tenant let a room).

[Eric Mc]

I still think 50:50 is excessive.

You may also need top consider non-tax issues too.

[paulmnz]

eldar said:

Read this. It explains the rules fairly comprehensively, I think.

http://www.hmrc.gov.uk/manuals/pimmanual/pim4001.h...

I've read that - it explains the rent-a-room scheme well, but I'm suggesting I should opt out of that scheme as it would be more tax efficient to claim expenses against the rent assuming my expenses can be split evenly and I can claim against the list I posted.

I'm therefore assuming the expense rules i should be applying are for residential letting? the issue is that I live in the property - the residential letting information seems written for those with BTL properties where the whole property is let.

I've been looking here: http://www.gov.uk/renting-out-a-property/paying-ta...

[paulmnz]

Eric Mc said:

I still think 50:50 is excessive.

You may also need top consider non-tax issues too.

how would i fairly (in the eyes of HMRC) calculate this? even at 30% of the costs it would still be better to claim the tax relief than the rent-a-room scheme (tax relief on ~£6k rather than the £4250)?

non-tax issues?

[Eric Mc]

Non tax issues - Insurance, Mortgage.

As for the split - "fair and equitable".

[NicD]

also, there may be a CGT (Capital Gains Tax) dimension when you sell the flat if you claim expenses, but there are also dispensations, just be aware of the issue.

[paulmnz]

Eric Mc said:

Non tax issues - Insurance, Mortgage.

As for the split - "fair and equitable".

Yes, I've check those.

I guess I find the term 'fair and equitable' surprisingly vague for a govt department. I would argue the property is split evenly as all the facilities are shared with no 'out of bounds' areas other than each others bedrooms. there are no garages, rooms or facilities I would have sole access to, and I work late and travel a lot, so it could be argued the lodger would use the kitchen, tv etc much more than me.

assuming a fair split can be established, the list I'm using is applicable? anything I've missed?

Sounds like I need to speak to a tax specialist or the HMRC helpline...

[paulmnz]

NicD said:

also, there may be a CGT (Capital Gains Tax) dimension when you sell the flat if you claim expenses, but there are also dispensations, just be aware of the issue.

I asked about this in the original post - my understanding is that as long as it is a single lodger at any one time, you still get CGT relief on the property if you sell.

see:
http://www.hmrc.gov.uk/manuals/cgmanual/cg64702.ht...

[Eric Mc]

paulmnz said:

Yes, I've check those.

I guess I find the term 'fair and equitable' surprisingly vague for a govt department. I would argue the property is split evenly as all the facilities are shared with no 'out of bounds' areas other than each others bedrooms. there are no garages, rooms or facilities I would have sole access to, and I work late and travel a lot, so it could be argued the lodger would use the kitchen, tv etc much more than me.

assuming a fair split can be established, the list I'm using is applicable? anything I've missed?

Sounds like I need to speak to a tax specialist or the HMRC helpline...

In reality, you can claim what you like - but your claims will always be subject to possible scrutiny by HMRC.
It depends on how far you want to push it.

UK tax law is amazingly vague in many areas. The words "fair and equitable" and "reasonable" crop up an awful lot.

I would read carefully through the HMRC link posted up by the other poster.

[paulmnz]

paulmnz said:

So, I'm going to get a lodger in central London, my rental income will be approximately £12k a year. The means I'm well over the £4250 tax-free threshold.

I'm a higher-rate tax payer, so earnings over the £4250 will be taxed at 40%.

It seems to me that I should opt to pay tax on the lot and claim expenses against the let rather than opting into the rent-a-room scheme.

My question is, which of the following can I claim and what proportion (it's a 2 bedroom flat with myself and potentially one lodger, so I'm assuming 50%?)

- Mortgage / lending (interest costs only)
- electricity
- building cost (block of flats with a yearly standing charge)
- ground rent
- telephone and internet
- tv license
- council tax
- 10% of the rental charge for depreciation of furniture

That lot adds up to ~£19k a year in total, so I'm expecting £8.5k would be considered expenses against the lodger income?

This would mean I would pay 40% on the nett income of £3500. If I opted into the rent-a-room scheme I would pay 40% on £7750?

I understand that as I am renting a single room I am still subject to capital gains relief if I sell the flat - correct?

I plan to seek some independent tax advice, but does this seem broadly correct? anything I've missed which I can also claim against the lodger income?

Thanks.

Updating this thread for anyone who might be interested.

Having spoken with the tax (wo)man at HMRC today...

I can claim relief on 50% of allowable expenses covered under the guidance for residential furnished letting (so everything in my list). the proportion is based on the number of bedrooms occupied by a lodger (so for example a 4 bedroom house with one room for a lodger would be 25%) they are very clear on this point.

CGT will not apply as long as I complete any house sale / move within an 18 month period of myself moving out of the property.

So, for anyone letting well above the rent-a-room scheme threshold with a hefty mortgage it will make sense to opt out and pay income tax on net income after allowable expenses.

thanks all for your input.

[Eric Mc]

Get that in writing.

HMRC will not stand behind advice they give over the telephone.

Did she explain that the 10% of the Rental Charge (actually officially referred to as the Wear and Tear Allowance) is 10% of Rents AFTER deducting Council Tax and Water Charges?

And if you DO claim the 10% Wear and Tear allowance, you CANNOT claim for the direct replacement of items of furniture or household goods.

Edited by Eric Mc on Tuesday 13th May 14:29

[TTmike]

Hi Paul,

I'm in the same situation as you were this year - wondered how this panned out with HMRC, and if they were happy with the 50:50 split?

If so did you get this in writing/were there any manuals they pointed you to?

Cheers,
Mike

If only the rent-a-room scheme was set at a level to cover London rents....

[oyster]

I suspect only about 5% of all people with lodgers even declare this to HMRC.