Tax for HMO

[Johnr12]

Hello all,

I own and live in a five bedroom house with my wife and four friends who all pay me rent, making us an HMO. My friends all have shorthold tenancy agreements.

Firstly, I am wondering if my friends are technically lodgers or tenants? (Particularly from a tax point of view).

Also, what should I be doing with regard to paying tax on the rental income? How much should I be paying in tax? I have taken a look at various sources on the internet which mention deducting expenses, rent a room schemes (for lodgers), and various other information. I am finding this somewhat confusing, as I do not know if my friends are considered tenants or lodgers. What tax calculation would apply to my particular situation might I ask? Jointly, my four friends give me £950 per calendar month at the moment, if that has any bearing on how it is calculated. My mortgage payment is £1016 per month, so the rental income does not cover this expense. Is my mortgage payment even considered for tax purposes?

Thank you kindly, John.

[Poppy]

My friends all have shorthold tenancy agreements.

Then they are tenants and not lodgers.

Whether you have tenants or lodgers you must declare your income using a HMRC Self-Assessment Tax Return (http://www.hmrc.gov.uk/individuals/tmaself-assessment.shtml). It's the same form, but you'll fill in different boxes depending on your circumstances.

[Editor]

Not so sure you are correct here Poppy?
The agreement means nothing when it comes to tenancies - it's always the situation that counts.
If you all live together and the tenants don't have separate facilities (self contained flats) ie they don't have exclusive posession and all of you share cooking / washing facilities then they are lodgers.
You need to declare your rental income on your self-assessment tax return.
If you opt for the rent-a-room scheme you can earn £4250 before tax, and there's other allowances if you provide meals. On the other hand you may be better off not doing and claiming expenses.
A question on the tax section may be best for this as I'm not sure how this works with mortgage interest in your own home. You obviously won't be able to claim it all, but not sure if you can claim some?
See: http://www.landlordzone.co.uk/lodgers_rent-a-room.htm

[Johnr12]

Thank you both.

Forgive my complete lack of knowledge here, but if I am making no profit whatsoever from my rental income after I have paid my mortgage (as is definitely the case here), then I will not have to pay tax? Is my mortgage payment a legitimate expense?

Will it be the case that I need to fill in the form and then I will be informed that I do not owe anything? Am I only taxed on any profit made? Is there a list of permitted expenses to be found anywhere online for me to look at?

Thank you very much, John.

[Tax Accountant]

You can choose which of the following two methods is best for you.

METHOD A:
Paying tax on the profit you make from letting worked out in the normal way for a rental business (that is, rents received less allowable expenses),

Broadly speaking, in calculating rental business profits you can deduct business expenses so long as they are incurred wholly and exclusively for business purposes, and not of a capital nature.

Where you let a part of your home, you need to split expenses between private use and rental use.

It is impossible to lay down hard and fast rules because circumstances vary enormously. The aim is for the rental business deductions to reflect the commercial use of the property in a fair and reasonable way.

Interest on a loan on your own home that is partly let may also be split in the way outlined above.

Details of allowable expenses could be found at HMR&C PIM2015 at the link: expensehttp://www.hmrc.gov.uk/manuals/pimmanual/pim2015.htm

This method applies automatically unless you tell your tax office within the time limit that you want method B - see below.


METHOD B:
Paying tax under Rent a Room scheme which applies to income from providing furnished residential accommodation in your only or main home.

Under this simplified scheme, you are taxed on the gross amount of your receipts from tenants (including receipts for any related services you provide or the tenants' contribution for utility bills) in excess of the £4,250.

But you can’t then claim any of the expenses of the letting, including any deduction for loan interest.

Conclusion:
It may be that you will be better off calculating your rental profits on the normal basis rather than claiming Rent a Room Relief.

I hope this helps.

Ramnik