Claiming interest on mortgage for lodgers

[jon2]

I am a live-in landlord with two lodgers.

I am filling in my tax return for 08-09 and trying to figure whether to use rent-a-room relief or claim expenses.

The crux of it is how much, if any, of the interest on my mortgage I can claim as an expense. As I see it, if I can get my expenses to above £4250 (mortgage interest, maintenance, new boiler, ground rent, etc), then it's worth not using rent-a-room.

Various sources have said I can take
- 2/3 (as each of us get equal use from the house)
- 2/7 (as two of the seven of the rooms are lodger's bedrooms, assuming a toilet counts as a room)
- 30% (as this is the proportion of floor space of the flat taken up by lodger's bedrooms)

The HMRC guidelines (e.g. http://www.hmrc.gov.uk/manuals/pimmanual/PIM2105.htm) are not definitive on the matter.

Is there any definitive source for this - or is it subjective? Which one should I go for?

Also, can I ask
- is a new boiler an acceptable expense?
- is general house improvements allowed as expenses (e.g. materials for DIY I've done to the house)?
- is equipment for the house an allowed expense (e.g. a new kettle)?
- do I need to pro-rata all expenses using the same ratio as for mortgage interest?

Finally, what's the impact on CGT by using the expenses system rather than rent-a-room? Do I need to worry about it now if I'm not planning to sell the property in the near future?

Thanks in advance!

[wamstax]

Hi there as far as the interest is concerned there could be an argument that the loan was not taken out for the purposes of letting if you owned the house before it was let (or you took in lodgers) so why should any of the loan interest be allowable as you incurred the cost to acquire an asset namely your home as an investment. However clearly there is also the argument that part of the loan interest is being laid out wholly and exclusively to achieve the rents.

Your link suggests that the amount apportioned is to be a reasonable and fair one - so clearly that leaves a lot of scope for HMRC to argue with your idea of fair and reasonable as to what is incurred "wholly and exclusively" for the purposes of the letting taking into account the area used by the lodgers and the time used by the lodgers .

Looking at you having a 7 room house (not knowing what you view as a room) then it is likely that 2 bedrooms are used exclusively for letting and one is used by you for personal. This leaves 4 rooms (living room kitchen and toilet) that are not used "wholly and exclusively for letting" and which might be used less by the lodgers than yourself (and possibly other guests). Clearly 2/3rds is not fair and reasonable as it would appear unlikely that you all use the other 4 rooms equally and there may in fact be one that is not used by the lodgers at all. Equally the lodgers will use more than their single bedrooms (unless you restrict them to their own room except cooking times /toilet etc. So possibly 50% might be a reasonable figure. However be prepared for the stickler Inspector that might take the view that none of the loan interest was for the purposes of reaping your letting rewards but for acquiring an asset.

To your specific questions
A new boiler would not be allowable (if you claim W&T allowance based on the rentals received) as it is a replacement and you either claim 10% of the rents (excluding services provided etc) received as wear and tear or the actual costs of replacing fixtures and fittings that fail during the letting. But remember you would only be allowed to claim the appropriate proportion of the expense attributable to the letting
General repairs are allowable HOWEVER improvements are not allowable
re Kettle - see replacement on boiler above - sadly if you don't let them use you kettle it is not for the letting is it.
Not necessarily - e.g. a repair to your bedroom would not be allowable but one to the lodgers would be totally allowable during the period of the letting

I trust that you are aware that you need to elect for the special treatment of rent a room within 22 months of the relevant year of assessment and will remain in force as long as your return calculates the taxable lodgers income on the special basis. Any alteration in the manner of the calculation to actual will amount to a withdrawal of the election.

OK best of luck