Renting out multiple rooms in own home (where I live)

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    Renting out multiple rooms in own home (where I live)

    Hi,

    I've tried a search but can't seem to find this...

    What is the tax position on offsetting mortgage interest against rental income from multiple rooms in the house where I myself live?

    I'm thinking of buying a house and renting rooms out to 3 of my mates. One could obviously fall under the 'rent a room' scheme, so that's no problem. For the other two, can I offset part of my mortgage interest payments against the income to reduce the tax liability? As a higher rate taxpayer from my job, tax will be hefty if I can't offset anything...

    The government website says allowable expenses include 'interest on property loans' but 'If the expense is only partly for running your business (or if you use the property yourself) then you may only be able to claim part of it'. How much is 'part of it'? I am buying the property primarily to rent out those rooms - say I have myself living there, plus one 'rent a room' person, then two others, does that mean I can offset 50% of the interest against the income from those two people, or is it not that simple?

    Any other bright ideas? I'd really like to do this, but if I have to pay 40% on pretty much all the income from the other two people (other allowable expenses being minimal), then I don't think it would be financially viable, which would be a great shame...

    #2
    You only ever pay tax on profits that you make...

    So (normally speaking) paying tax is a good indication that something is financially viable.
    I can take no responsibility for the use of any free comments given, any actions taken are the sole decision of the individual in question after consideration of my free comments.

    That also means I cannot share in any profits from any decisions made!

    Comment


      #3
      Two things on this:

      The opportunity cost - to sell my flat and buy the property in question will mean using the £170k I have in savings accounts, which even with HRT might still be more profitable than the house idea. So when I say 'not financially viable' I guess I should say 'less profitable than investing the money elsewhere'.

      But probably more important, if I CAN'T offset the mortgage interest, then increases in the interest rate would hit me hard. I might make a taxable profit 'in theory' from the rent, but the mortgage interest might be far greater than the rent, a problem if I can't offset - hence my question...

      Comment


        #4
        Originally posted by scarletjim View Post
        One could obviously fall under the 'rent a room' scheme, so that's no problem. For the other two,
        Sorry, obviously you cannot have your cake and eat it. Rent a room does not apply if you are also offsetting interest.

        can I offset part of my mortgage interest payments against the income to reduce the tax liability? say I have myself living there, plus one 'rent a room' person, then two others, does that mean I can offset 50% of the interest against the income from those two people, or is it not that simple?
        No, it's not that simple. I have seen it argued that because you use the kitchen and communal areas then the interest may not be offset.

        N.B. If you have more than one lodger you will be subject to CGT when you sell the property - if it has gone up in value..

        Any other bright ideas?
        Buy one to live in and one to let out.

        Comment


          #5
          Originally posted by Telometer View Post
          Sorry, obviously you cannot have your cake and eat it. Rent a room does not apply if you are also offsetting interest.
          Perhaps I'm not making myself clear - I'm NOT suggesting offset off interest against 'lodger 1'. I'm suggesting using 'Rent a Room' scheme for lodger 1, then completely separately treat lodgers 2 and 3 as tax liable income, so I want to offset some of the interest against their income (not lodger 1 income obviously). So if I use the kitchen and lounge etc, could I still claim say 25% of the mortgage interest payment? If I can't claim any, why would the government website include the quote I used in my opening post?

          On your other comment about CGT, hmmm hadn't thought of that, and need to...
          As for buying two, haha no chance, the whole point of this is for us all to live somewhere really nice - to buy one nice one for myself and another for my mates would be financial suicide because they can only afford minimal rent.

          Comment


            #6
            Sorry, you cannot have your cake (claim rent a room relief for one lodger) AND eat it (claim interest expense for the others) on the same property at the same time.

            One or the other.

            Where does HMRC say you can have both? I'll give you £25, real money, via paypal, if you can show me.

            Comment


              #7
              Read PIM4001. Depending on the numbers RaR may not be the way forward. If you do not use RaR when a portion of your housing costs will be deductible from the gross lodgers income. This portion is the ratio of the total house floor area compared to the three lodgers rooms, and a bathroom if they have sole access to one. No communal areas count. Interest on the loan, rates, water, electricity, buildings insurance, maintenance are all deductible in the established proportion. Read :
              http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm#1
              for the CGT implication when having more then one lodger. Regards Peter

              Comment


                #8
                Originally posted by Telometer View Post
                Sorry, you cannot have your cake (claim rent a room relief for one lodger) AND eat it (claim interest expense for the others) on the same property at the same time.

                One or the other.

                Where does HMRC say you can have both? I'll give you £25, real money, via paypal, if you can show me.
                There is nowhere where it says you can do this, but equally there is nowhere where it says you can't! Therefore in theory I don't see why you can't do RaR for lodger 1 (as it's only allowed for one room), then treat the others as tax liable rental income. Happy to be corrected if someone can show me where it says you cant do this...

                Thanks to Pete for the PIMs, they provide a bit more detail than the government website I was quoting...

                Comment


                  #9
                  Originally posted by TaxationPete View Post
                  Read :
                  http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm#1
                  for the CGT implication when having more then one lodger. Regards Peter
                  Thanks for this - I think it's ok for me though. If I do this, I will only be letting about 25% of my home, so if I understand correctly I'd have to make a gain of £160k to breach the £40k lower limit.

                  Comment


                    #10
                    What £40,000 lower limit. If a capital gain did result then you have a capital gain allowance of £10,100. Regards Peter

                    Comment


                      #11
                      Originally posted by scarletjim View Post
                      Happy to be corrected if someone can show me where it says you cant do this...
                      Found it myself, unfortunately. PIM4012 is pretty clear that all 'sources' in the same property must either be considered as RaR, or not. Boo, that screws my plans up big time. I don't understand that personally - I'm trying to provide a room for someone who needs one, but because that requires a bigger house, I'm actually gonna be worse off overall because I lose the RaR option that I have currently with only one lodger in a smaller property. Talk about not encouraging people to progress...

                      Comment


                        #12
                        Originally posted by TaxationPete View Post
                        What £40,000 lower limit. If a capital gain did result then you have a capital gain allowance of £10,100. Regards Peter
                        Letting all or part of your home
                        If you've let out all or part of your home you may not get full Private Residence Relief when you sell or dispose of it, but you may get another relief known as 'Letting Relief'.

                        The maximum amount of Letting Relief due is the lower of:

                        •£40,000
                        •the amount of Private Residence Relief due
                        •the amount of gain you've made on the let part of the property
                        Example
                        You used 60% of your house as your home and let out the other 40%.

                        You sell the property, making a gain of £60,000.

                        You're entitled to Private Residence Relief of £36,000 on the part used as your home (60% of the £60,000 gain).

                        The remaining gain on the part of your home that's been let is £24,000.

                        The maximum Letting Relief due is £24,000 as this is the lower of:

                        •£40,000
                        •£36,000 (the Private Residence Relief due)
                        •£24,000 (the gain on the part of the property that's been let)
                        There's no Capital Gains Tax to pay - the gain of £60,000 is covered by the £36,000 Private Residence Relief and the £24,000 Letting Relief.

                        Comment


                          #13
                          You refered to a lower limit of £40,000. Letting relief will be a available to you up to a maximum of £40,000 In the example you quote the property attracted £24,000. LR is basically the gain on the property divided by the total number of days you have owned it, apportioned by the established rental ratio and then multiplied by the acually number of days you have rental the rooms out. Regards Peter

                          Comment


                            #14
                            As I previuosly said going the non RaR may be in your favour due to the deduction you can make, obviuosly apportioned, but morgage/loan interest, insurance, rates, utility bills, repairs, maintenance, all sorts of things. You need to run some numbers. Regards Peter

                            Comment


                              #15
                              Say I had 3 lodgers, then the expenses numbers maybe stack up as follows (back of fag packet calcs obviously):

                              Council tax say £1800 x 75%
                              Electric, gas etc £1200 x 75%
                              Wear n tear 10% of rental income
                              Mortgage interest maybe 30% (the amount of the house that is exclusive to the tenants)

                              One question - is it ok for the percentages to be different? I.E. 30% of mortgage interest due to floor space taken, but a fairer % of other bills?

                              If the above is ok, then I think this will add up to about the same as the RaR allowance!Typical!

                              Comment

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