New BTL landlord's lodgers' rent- tax treatment?

[princess]

Hi everyone

I need some help with regards to tax. I've bought a house and am planning on getting 2 lodgers. I work full time and earn £16485 per annum (gross). I am planning on charging each lodger £350 each. Could you let me know the following:

(a) where do i even start with regards to tax
(b) how much i'm likely to be charged
(c) anything else i might need to take into consideration
(d) if i get any discount on water rates/council tax etc etc....

Thanks very much

[Poppy]

Using the same numbering:

(a) The HM Revenue and Customs (HMRC) allow you to receive £4,250 per year before paying tax on the rental income. You will need to complete a Self-Assessment Tax Return. Have a look at these websites:
DirectGov (http://www.direct.gov.uk/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/TaxOnRentalIncomeArticles/fs/en?CONTENT_ID=4017804&chk=mGasop)
HMRC Help Sheet (http://www.hmrc.gov.uk/helpsheets/ir223.pdf)

(b) Depends on your gross earnings for all income streams

(c) Don’t inadvertently give your lodgers more rights and exclusive possession than necessary. Start learning about your rights.

(d) Don’t be silly!

[Tax Accountant]

I would refer you to the following link from HM Revenue & Custom's website regarding the exemption from Income Tax of upto £4,250 rents under the ''rent a room ''scheme. This is to encourage owner occupiers to offer spare rooms in their main home.

http://www.hmrc.gov.uk/manuals/pimmanual/PIM4001.htm

The tax office may not require you to complete any self-assessment tax returns if it is clear that all rent is more than fully covered by the ''rent a room'' scheme.

I believe that letting of one room is also exempted from Capital Gains Tax (CGT). However, letting of additional rooms may give rise to CGT liability, but this is highly unlikely.

As far as Council Tax is concerned, you may lose your ''single occupier'' discount.

Ramnik

[Worldlife]

We live and learn! I didn't appreciate that "Rent a Room" tax concession could apply to several rooms.

In this case however the total projected rental income from two rooms is £8,400 per annum. If the £4250 allowance is deducted doesn't this mean that tax will be due of £4150 for the total rental income?

The OP states she is a "Complete beginner".

It could be that Princess is creating a House in Multiple Occupation See LandlordZONE House in Multiple Occupation article (http://www.landlordzone.co.uk/HMOs1.htm) and read the specific forum here.

I believe some Councils have special rules in designated areas so ii might be best to check with the local Environmental Health Department before moving ahead with this project as there could be other (tax allowable) expenses in making the property suitable for the intended use. Worth clearing whether or not Planning Consent or Building Regulation approval might be needed.

You will also have to deal with safety issues such as getting the necessary gas safety certificates.

With a single rent a room scheme you have a "guest" rather than a tenant but this situation may change if you have more than one tenant. If you have not done so read up on these forums about the problems of issuing correct tenancy agreements. See my link on useful free literature (including the Rent a Room Scheme)
Useful free publications (http://www.landlordzone.co.uk/forums/showthread.php?t=3082)

[Tax Accountant]

We live and learn! I didn't appreciate that "Rent a Room" tax concession could apply to several rooms.

In this case however the total projected rental income from two rooms is £8,400 per annum. If the £4250 allowance is deducted doesn't this mean that tax will be due of £4150 for the total rental income?

Why is the projected income from two rooms £8,400? Did you mean to say 2 x £4,250 = £8,500?

In any case only £4,250 per house is relieved under the ''rent a room'' scheme regardless of the number of rooms let.

Ramnik

[Worldlife]

Why is the projected income from two rooms £8,400? Did you mean to say 2 x £4,250 = £8,500?

In any case only £4,250 per house is relieved under the ''rent a room'' scheme regardless of the number of rooms let.

Ramnik

Checked my calculations again and the rent is £350 per month = £4200 per annum giving £8400 projected income. The projected income of £8500 does not seem to accord with these figures.

£8400 less the £4250 rent a room allowance leaves a balance of £4150 for which tax must be paid.

From the HMO forum I see that with a resident landlord it might be possible to let to two lodgers without incurring the wrath of the HMO requirements. Still recommend Princess reads the booklets given in my link to get more info and avoid creating protected tenancies.

[Tax Accountant]

Checked my calculations again and the rent is £350 per month = £4200 per annum giving £8400 projected income. The projected income of £8500 does not seem to accord with these figures.

£8400 less the £4250 rent a room allowance leaves a balance of £4150 for which tax must be paid.

From the HMO forum I see that with a resident landlord it might be possible to let to two lodgers without incurring the wrath of the HMO requirements. Still recommend Princess reads the booklets given in my link to get more info and avoid creating protected tenancies.

I can see where you are getting the projected rent of £8,400.

In that event, as you say, only £4,250 is exempted and the remainder £4,150 will be taxed at 22%, making tax on rent in the sum of £913.

Alternatively, the owner could calculate the rental expenses in the conventional way to see if it comes to more than the £4,250 rent a room relief. If so, tax will be charged on rents less the expenses. Any expenses not specifically for the let rooms should be apportioned between the let rooms and the other rooms.

Ramnik