Rent-a-room scheme
Discussion
I'm trying to get my head around this right now but am a bit confused.
Basically I plan on buying a house next year where i'll be living as my primary residence. It is a 4bed house and so 3 friends will be occupying the other rooms as tenants. What's the best way to go about this? I will not make any income from this as the rent is less than the mortgage repayments (mortgage is standard repayment btw). From what I understand, I simply just take their rent officially but will not have to pay any tax on it, is that correct?
Basically I plan on buying a house next year where i'll be living as my primary residence. It is a 4bed house and so 3 friends will be occupying the other rooms as tenants. What's the best way to go about this? I will not make any income from this as the rent is less than the mortgage repayments (mortgage is standard repayment btw). From what I understand, I simply just take their rent officially but will not have to pay any tax on it, is that correct?
I believe you are allowed up to £4,250 per year tax free under the rent-a-room scheme.
I believe this is in total- so anything above this you would be eligable for income tax on (ie 3 mates at 200pcm each will mean you would be taxed on the £2,900 above the £4250..
The size of you mortgage repayments makes absolutely no difference to this..
The plus point of rent-a-room is that you do not need to declare income below the threshold to HMRC, provided you keep the total income below around £350 pcm (or £4250 per year) you don't need to worry about any additional tax.
Go above this and you do.
Hope this helps,
I believe this is in total- so anything above this you would be eligable for income tax on (ie 3 mates at 200pcm each will mean you would be taxed on the £2,900 above the £4250..
The size of you mortgage repayments makes absolutely no difference to this..
The plus point of rent-a-room is that you do not need to declare income below the threshold to HMRC, provided you keep the total income below around £350 pcm (or £4250 per year) you don't need to worry about any additional tax.
Go above this and you do.
Hope this helps,
This thread www.pistonheads.com/gassing/topic.asp?t=225566&f=141&h=0&hw=rent+hiasakite maybe of use to you as I started it when I started letting one of my rooms out..
Ok, so just treat it as a normal BTL effectively? As in, i'll only get taxed on the income above the mortgage repayments i.e. nothing?
How do they 'know' who's living at the house and does it matter? As in can I just live there with the missus and they just pay me cash or is that tax evasion/insurance issues etc?
Basically I'm asking what is the best (and legal) way to go about this?
How do they 'know' who's living at the house and does it matter? As in can I just live there with the missus and they just pay me cash or is that tax evasion/insurance issues etc?
Basically I'm asking what is the best (and legal) way to go about this?
david_s said:
Best thing? Get them to pay cash....
Indeed, girl I worked with did this and just paid the mortgage and all bills etc out her wage packet and used the money to live on. Even if you dont do it with all the people, say 2 out the 3 then it could reduce your tax liability.
With that many people in the one place not related to each other, wont you be liable for multiple occupancy laws from the local council?
Seany88 said:
Ok, so just treat it as a normal BTL effectively? As in, i'll only get taxed on the income above the mortgage repayments i.e. nothing?
How do they 'know' who's living at the house and does it matter? As in can I just live there with the missus and they just pay me cash or is that tax evasion/insurance issues etc?
Basically I'm asking what is the best (and legal) way to go about this?
How do they 'know' who's living at the house and does it matter? As in can I just live there with the missus and they just pay me cash or is that tax evasion/insurance issues etc?
Basically I'm asking what is the best (and legal) way to go about this?
NO-
Under rent-a-room you do not get taxed on the bit above your mortgage repayments.. your mortgage is irrelevant.. you get taxed on everything above £4250 per year- whether you annual mortgage is £1K or £10K makesno difference
If they pay you cash in hand, you recieve more then £4250 per year in rent from this and you do not declare any rent-a-room income above the £4250 then technically its tax evasion/avoidance (not sure which)- however it all depends if they find out..
emicen said:
With that many people in the one place not related to each other, wont you be liable for multiple occupancy laws from the local council?
What laws are these and how do they affect me?
hiasakite yes so what i'm saying is to forget about the rent-a-room scheme and declare the letting income, which means i'd have to pay no tax (assuming I have no income left after expenses) right?
"Rent a Room" was specifically brought in during the mortgage crisis in the early 1990s to besically "legalise" the many people who were breaking the law by not declaring rental income from lodgers. It was seen by John Major's government that it would be political suicide to prosecute home owners who were taking in lodgers in an attempt to stop their homes being repossessed.
If you are using this scheme, you MUST pay tax on the value of rents exceeding the current annual limit of £4,250. RNo costs can de deducted against the surplus over £4,250.
"Rent a Room" is not compulsory and you could always volunteer to disclose your rental income in the "old fashioned way" i.e. show the actual income received from your lodger and deduct from that the legitimate running cost of looking after that lodger. That would include all the usual things, providing services (laundry, repairs etc). Please note that mortgage REPAYMENTS are npt allowable costs. Only mortgage INTEREST. Additionally, in the case of rent from a lodger, only a proportion of the mortgage INTEREST would be offset against the rent.
Regarding the Revenue "finding out", it is your legal obligation to declare your income to the Revenue. It is not their respnsibility to "find out".
Finally, you might need to check the terms and conditions of your mortgage with the loan company/bank to ensure that taking in a lodger is allowed.
If you are using this scheme, you MUST pay tax on the value of rents exceeding the current annual limit of £4,250. RNo costs can de deducted against the surplus over £4,250.
"Rent a Room" is not compulsory and you could always volunteer to disclose your rental income in the "old fashioned way" i.e. show the actual income received from your lodger and deduct from that the legitimate running cost of looking after that lodger. That would include all the usual things, providing services (laundry, repairs etc). Please note that mortgage REPAYMENTS are npt allowable costs. Only mortgage INTEREST. Additionally, in the case of rent from a lodger, only a proportion of the mortgage INTEREST would be offset against the rent.
Regarding the Revenue "finding out", it is your legal obligation to declare your income to the Revenue. It is not their respnsibility to "find out".
Finally, you might need to check the terms and conditions of your mortgage with the loan company/bank to ensure that taking in a lodger is allowed.
Thanks Eric, forgot that repayments do not count as expenses.
Right so how about I take out an interest-only mortgage, thus having to pay less (if any) income tax. The property will actually be in both mine and my dad's name, so does that mean I still cannot claim the entire mortage payment as an 'expense'?
Also read on DirectGov that letting agent's fees count as allowable expenses, so could I register as a limited company and just charge a percentage of the monthly rent so that the income = expenses and therefore no tax to pay? Or basically state maintenance costs etc to reduce the tax liability?
Right so how about I take out an interest-only mortgage, thus having to pay less (if any) income tax. The property will actually be in both mine and my dad's name, so does that mean I still cannot claim the entire mortage payment as an 'expense'?
Also read on DirectGov that letting agent's fees count as allowable expenses, so could I register as a limited company and just charge a percentage of the monthly rent so that the income = expenses and therefore no tax to pay? Or basically state maintenance costs etc to reduce the tax liability?
Seany88 said:
emicen said:
With that many people in the one place not related to each other, wont you be liable for multiple occupancy laws from the local council?
What laws are these and how do they affect me?
hiasakite yes so what i'm saying is to forget about the rent-a-room scheme and declare the letting income, which means i'd have to pay no tax (assuming I have no income left after expenses) right?
HMO regs, homes of multiple occupation, as far as I know (well as far as the letting agent explained to me) refers to those with 3 floors & 5 people or more. My house we rented had a hard wired industrial fire alarm, fire doors etc etc. Make sure you check, hopefully doesn't apply to you.
On a side note, I intend to only live there next year, and after that keep it as a landlord and rent out wholly. Long-term wise, it is best to have an interest-only mortgage as opposed to repayment right?
Can someone explain to me how to work out the interest-portion of a repayment mortgage? As i've understood from previous dicussions, the interest portion decreases as you pay the mortgage off because the overall sum to pay back decreases each year? Is it therefore simply to work out the fixed percentage of interest on the overall sum each month/year?
If say the interest-only is £1000/mth but the repayment is £1450/mth then how do you determine whether its worth paying that extra $450/mth now? And how does this reflect when the time comes to sell up i.e. regarding CGT etc?
Sorry for all the questions, its just my first investment and don't want to go for the most obviously attractive deal to find out i've screwed myself over in 5yrs time!
Can someone explain to me how to work out the interest-portion of a repayment mortgage? As i've understood from previous dicussions, the interest portion decreases as you pay the mortgage off because the overall sum to pay back decreases each year? Is it therefore simply to work out the fixed percentage of interest on the overall sum each month/year?
If say the interest-only is £1000/mth but the repayment is £1450/mth then how do you determine whether its worth paying that extra $450/mth now? And how does this reflect when the time comes to sell up i.e. regarding CGT etc?
Sorry for all the questions, its just my first investment and don't want to go for the most obviously attractive deal to find out i've screwed myself over in 5yrs time!
Forget the limited company route. You would only be making life extremely complicated for yourself. If you managed the property through a limited company and the company charged management fees, the company would pay Corporation Tax on its profits and YOU would pay Income Tax (amd possibly National Insurance too) on money you perosnally extracted from the company.
Calculating the interest element on individuial monthly payments of a normal repayment mortgage (or any type of loan for that matter) can be horrendously complicated. Usually, the lender supplies an annual statement to the borrow showing the overall interest charged in the yer. It is that interets figure that is used as the basis of the expense claim against the rental income on the property.
If the peoperty is jointly owned, the two individuals who own the property need to return to the Revenue their share of the rental income separately.
If the property at any stage is or will be used as your Principal Private residence, you will be able to mitigate any Capital Gains Tax on the eventual disposal of the property.
By the way, none of these comments to Rent A Rome income. Thje assumption is that the Rent a Room is being applied to your home and therefore the disposal would be CGT exempt anyway.
Calculating the interest element on individuial monthly payments of a normal repayment mortgage (or any type of loan for that matter) can be horrendously complicated. Usually, the lender supplies an annual statement to the borrow showing the overall interest charged in the yer. It is that interets figure that is used as the basis of the expense claim against the rental income on the property.
If the peoperty is jointly owned, the two individuals who own the property need to return to the Revenue their share of the rental income separately.
If the property at any stage is or will be used as your Principal Private residence, you will be able to mitigate any Capital Gains Tax on the eventual disposal of the property.
By the way, none of these comments to Rent A Rome income. Thje assumption is that the Rent a Room is being applied to your home and therefore the disposal would be CGT exempt anyway.
Edited by Eric Mc on Tuesday 21st November 23:59
Eric Mc said:
Forget the limited company route. You would only be making life extremely complicated for yourself. If you managed the property through a limited company and the company charged management fees, the company would pay Corporation Tax on its profits and YOU would pay Income Tax (amd possibly National Insurance too) on money you perosnally extracted from the company.
Calculating the interest element on individuial monthly payments of a normal repayment mortgage (or any type of loan for that matter) can be horrendously complicated. Usually, the lender supplies an annual statement to the borrow showing the overall interest charged in the yer. It is that interets figure that is used as the basis of the expense claim against the rental income on the property.
If the peoperty is jointly owned, the two individuals who own the property need to return to the Revenue their share of the rental income separately.
If the property at any stage is or will be used as your Principal Private residence, you will be able to mitigate any Capital Gains Tax on the eventual disposal of the property.
By the way, none of these comments to Rent A Rome income. Thje assumption is that the Rent a Room is being applied to your home and therefore the disposal would be CGT exempt anyway.
Calculating the interest element on individuial monthly payments of a normal repayment mortgage (or any type of loan for that matter) can be horrendously complicated. Usually, the lender supplies an annual statement to the borrow showing the overall interest charged in the yer. It is that interets figure that is used as the basis of the expense claim against the rental income on the property.
If the peoperty is jointly owned, the two individuals who own the property need to return to the Revenue their share of the rental income separately.
If the property at any stage is or will be used as your Principal Private residence, you will be able to mitigate any Capital Gains Tax on the eventual disposal of the property.
By the way, none of these comments to Rent A Rome income. Thje assumption is that the Rent a Room is being applied to your home and therefore the disposal would be CGT exempt anyway.
Edited by Eric Mc on Tuesday 21st November 23:59
Thank Eric, I have you say you know your stuff!
I'm trying to make things as simple for my dad as possible, and he is actually only helping me with the deposit on the house so does he still need to get involved with declaring any income (even though there won't be any)?
Can someone just reassure me that an interest-only mortgage is the best way to go? For the coming year, the rent should 'just' about cover the mortgage payments and then the house will be done to a better standard which will allow a higher rental income.
The main aims are:
To survive and learn in the first year (as i'll be living there) (and also slowly improving the house)
To attract a greater rental income the following year along with the transfer of the house into my name
In the medium to long-term to ideally gain from capital growth of the property (so in this respect is a repayment mortgage a better idea?)
The reason I was thinking about the limited company was because:
1. I could use it as a legitimate way of claiming letting agent's fees, cleaning, servicing, gardening etc
2. I intend to hopefully build a portfolio of many more houses in the future which could all be 'managed' by this limited company.
Does this sound feasible and viable? Or is it just not worth the hassle for the relatively small income it would generate? I haven't looked into this much yet btw, but thought it could be a good idea?
1. I could use it as a legitimate way of claiming letting agent's fees, cleaning, servicing, gardening etc
2. I intend to hopefully build a portfolio of many more houses in the future which could all be 'managed' by this limited company.
Does this sound feasible and viable? Or is it just not worth the hassle for the relatively small income it would generate? I haven't looked into this much yet btw, but thought it could be a good idea?
Eric Mc said:
....If the peoperty is jointly owned, the two individuals who own the property need to return to the Revenue their share of the rental income separately.
Accurate and informative as ever Eric.
Just to clarify, does that mean that if the property is purchased jointly in both Mr & Mrs Seany88 names, that the £4250 allowance will be applied to each tax payer separately - resulting in £8500 total allowance for the joint mortgagees?
Thanks,
apprentice
Edited by apprentice on Wednesday 22 November 11:46
Unfortunately not, Apprentice. The £4,250 allowance applies to the household, not the individuals in the household.
Regarding Seany B's query re his dad's deposit, if your dad is just giving you some cash to help you pay the deposit, then he has no legal involvement in the property being purchased. He has given you an outright gift in cash, end of story. Therefore, rental income derived from that property would be all accountable to the Revenue by you only.
However, if his name appears on the title deeds, then he should be accounting for his share of the rental profits.
Availing of the Rent a Room scheme kills all this complexity.
If you are thinking of becoming a "property development" business or a "property management" business, that is a whole different ball game and you really do need to seek professional advice regarding the best business vehicle within which to carry out these activities. Forming a limited company is always an option in these circumstances but it is not always the ideal solution - especially regarding businesses who's main income consists of rent from property/properties.
Regarding Seany B's query re his dad's deposit, if your dad is just giving you some cash to help you pay the deposit, then he has no legal involvement in the property being purchased. He has given you an outright gift in cash, end of story. Therefore, rental income derived from that property would be all accountable to the Revenue by you only.
However, if his name appears on the title deeds, then he should be accounting for his share of the rental profits.
Availing of the Rent a Room scheme kills all this complexity.
If you are thinking of becoming a "property development" business or a "property management" business, that is a whole different ball game and you really do need to seek professional advice regarding the best business vehicle within which to carry out these activities. Forming a limited company is always an option in these circumstances but it is not always the ideal solution - especially regarding businesses who's main income consists of rent from property/properties.
Eric Mc said:
Regarding Seany B's query re his dad's deposit, if your dad is just giving you some cash to help you pay the deposit, then he has no legal involvement in the property being purchased. He has given you an outright gift in cash, end of story. Therefore, rental income derived from that property would be all accountable to the Revenue by you only.
However, if his name appears on the title deeds, then he should be accounting for his share of the rental profits.
However, if his name appears on the title deeds, then he should be accounting for his share of the rental profits.
He is also acting as guarantour as such as I would not be able to offered a mortgage this size on my own. Is it possible to still use his leverage while leaving his name off the deeds?
Eric Mc said:
If you are thinking of becoming a "property development" business or a "property management" business, that is a whole different ball game and you really do need to seek professional advice regarding the best business vehicle within which to carry out these activities. Forming a limited company is always an option in these circumstances but it is not always the ideal solution - especially regarding businesses who's main income consists of rent from property/properties.
Ahh ok, well I don't intend for it to be my sole/primary business just more of a side venture and thought declaring it as a business would be better (read easier to justify costs for maintenance etc inc. labour costs).
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