Updating post from Reddit.
I’m buying a three-bedroom house and planning to rent out two of the rooms. I know I have two main options when it comes to tax: 1. Use the Rent a Room scheme and only pay tax on rental income above £7,500 2. Use the normal rental income method and deduct allowable expenses based on the portion of the house the tenants use
Since the tenants will occupy 75% of the property (their rooms plus their share of common areas), and will be well above the £7,500, I’m leaning toward the second option, but I’m finding it hard to get clear guidance on what exactly counts as an allowable expense, especially as some of the services provided benefit me as well.
Can anyone help me figure out how to work out what portion of the following I can deduct? • Utility bills • Mortgage interest • Cleaning fees • Council tax, internet, and home insurance
Just an observation on my part so you get £7,500 allowance before paying any tax on anything more this will probably be tax on £4.5k if you let it out for £1k pcm. Won't this be cheaper than renting it out and paying tax after deductions on the full £12k? I thought deductions were just a few minor things such as maintenance I can't see how you could bring the tax burden down enough unless I am missing something?
Thanks for the response
The biggest difference is being able to deduct a portion of my mortgage interest payments. When you add in other deductibles, it brings taxable income below what I would have in the Rent a Room scheme. Tax bill would be £100-£200 less per month
Problem is that mortgage interest deductible is only 20% of the interest (correct me if I am wrong) but will that equal £100-200 a month?
Mortgage interest would be £1,400. If I can only expense 20% then that changes things as I was under the impression I could expense it proportionally
Yeah it was changed a while back I think the only ones that can still benefit from it are holiday let landlords but not sure how long they have left because I'm sure they are trying to change policy for that too.
I think your situation would fall under the same as landlords. So 20% tax credit on interest.
They will occupy 66% not 75% - you’ll be a hmo so think about that - and do the rent a room it’s way way easier. Life’s too short
Thanks for this I calculated the 75% based on the square foot area of the house they have to themselves. Does that not matter in an HMO?
I dont think thjat would work for tax reasons - its worked on a per room basis - you need an accountant to give you a more accurate answer but see this - https://community.hmrc.gov.uk/customerforums/ifp/74a86e52-a6b4-ee11-a81c-6045bd0bdee0
The reason I say rent a room si better is if you are not going to be a licensed hmo then its just plain simpler - for the difference in money you'd get its not worth it
Yeah becoming a HMO will just need more costs and regulation as you might need to improve the property to meet the HMO regulations.
Council permission will be required plus insurance etc
Live in landlords can have two lodgers without counting as an HMO.
Three lodgers would be an HMO though.
Don't forget about capital gains tax - you'll be liable for a good chunk if your home increases in value and you sell, and have spent most or all of the time with lodgers.
If you let out 67% of your home then you'll get 33% private residence relief (plus 9 months of 100%) - and the maximum letting relief you will get would be another 33%. That leaves you paying capital gains on about 1/3 of any increase in property value when you sell.
Lodgers do not create a CGT liability