Letting rooms and income tax and VAT
Discussion
If I were to buy a 3 bedroom house for my student sister to live in for the next 4 years and allow her to rent out 2 of the bedrooms for X amount a month....
She would be managing this and any income from rent will be used to pay the bills and upkeep of the house + some pocket money hopefully.
How does this work from a tax point of view? The income of the rent would be around £8500/anum.
Her tax free allowance for 2010/2011 is £6,475.
Can the cost of bills (gas, electricity etc) be deducted from the rental income? This would then mean the actual proffit would be well below her tax free allowance and presumably not incur tax?
What paperwork would be required to demonstrate this to the tax man? I presume a self assessment would have to be done anually?
Any other things worth watching out for if the house is being managed in this way? (appart from the obvious dirty lodgers etc)
Also.. Can the cost of improvements and renovations be done VAT free because you are effectivley developing a "business"?
She would be managing this and any income from rent will be used to pay the bills and upkeep of the house + some pocket money hopefully.
How does this work from a tax point of view? The income of the rent would be around £8500/anum.
Her tax free allowance for 2010/2011 is £6,475.
Can the cost of bills (gas, electricity etc) be deducted from the rental income? This would then mean the actual proffit would be well below her tax free allowance and presumably not incur tax?
What paperwork would be required to demonstrate this to the tax man? I presume a self assessment would have to be done anually?
Any other things worth watching out for if the house is being managed in this way? (appart from the obvious dirty lodgers etc)
Also.. Can the cost of improvements and renovations be done VAT free because you are effectivley developing a "business"?
Edited by tegwin on Thursday 27th May 10:46
You would effectively be subletting your property to your sister for Nil Rent to you.
Obviously, with no rental income comin g to you, you would be incurring rental losses on the property which you would be able tio carry foraward to future years when you start picking up the rental income personally for yourself. This means you will not be getting any immediate tax relief for your allowable property costs - such as morgage interest and repairs, maintennce etc. You would be defrring those costs until the time you start receiving the rental income.
In the meantime, she would be keeping all the rental income for herself and would be liable to tax on that income.
She would be allowed to offset against her rental income allowable rental costs that SHE incurs - which may well be minimal.
She would indeed have to notify HMRC that she is receiving Rental Income and therefore have an obligation to complete a Self Assessment tax return.
If she has any other income, from any other sources, such as part time student work, that would also need to be shown on the return - even if she pays tax up front on this income
There are normally no VAT implications regarding rental income.
Obviously, with no rental income comin g to you, you would be incurring rental losses on the property which you would be able tio carry foraward to future years when you start picking up the rental income personally for yourself. This means you will not be getting any immediate tax relief for your allowable property costs - such as morgage interest and repairs, maintennce etc. You would be defrring those costs until the time you start receiving the rental income.
In the meantime, she would be keeping all the rental income for herself and would be liable to tax on that income.
She would be allowed to offset against her rental income allowable rental costs that SHE incurs - which may well be minimal.
She would indeed have to notify HMRC that she is receiving Rental Income and therefore have an obligation to complete a Self Assessment tax return.
If she has any other income, from any other sources, such as part time student work, that would also need to be shown on the return - even if she pays tax up front on this income
There are normally no VAT implications regarding rental income.
Edited by Eric Mc on Thursday 27th May 10:53
Thankyou for replying..
"She would be allowed to offset against her rental income allowable rental costs that SHE incurs"
If she organises the services and pays the bills for gas, electricty, insurance etc etc etc presumably these become HER costs and therefore become detucted from HER rental income I asume?
However... if she is then living there, the portion of the bills that she herself creates can not be considered allowable rental costs... so presumably somehow she needs to break the bills down into "her" and "tenants" to work out what cost to actually deduct from rental income?
Or am I overcomplicating things?
"She would be allowed to offset against her rental income allowable rental costs that SHE incurs"
If she organises the services and pays the bills for gas, electricty, insurance etc etc etc presumably these become HER costs and therefore become detucted from HER rental income I asume?
However... if she is then living there, the portion of the bills that she herself creates can not be considered allowable rental costs... so presumably somehow she needs to break the bills down into "her" and "tenants" to work out what cost to actually deduct from rental income?
Or am I overcomplicating things?
Um a solution:
When you buy the house, buy it in joint names.
So as long as an owner is resident, this frees you up from all kinds of regulations regarding being a "landlord" e.g. insurances and you can get a standard residential mortgage instead of a buy to let. Also technically you don't need gas inspections every year and compliant furniture (although you would be mad not to do this). You can also kick lodgers out immediately rather than giving them notice periods.
She is allowed to take something like £4000 a year rent tax free under the "rent a room" scheme. Put all the bills in the names of the residents and split them.
I'm not an accountant or expert, so do double check the above.
When you buy the house, buy it in joint names.
So as long as an owner is resident, this frees you up from all kinds of regulations regarding being a "landlord" e.g. insurances and you can get a standard residential mortgage instead of a buy to let. Also technically you don't need gas inspections every year and compliant furniture (although you would be mad not to do this). You can also kick lodgers out immediately rather than giving them notice periods.
She is allowed to take something like £4000 a year rent tax free under the "rent a room" scheme. Put all the bills in the names of the residents and split them.
I'm not an accountant or expert, so do double check the above.
tegwin said:
Thankyou for replying..
"She would be allowed to offset against her rental income allowable rental costs that SHE incurs"
If she organises the services and pays the bills for gas, electricty, insurance etc etc etc presumably these become HER costs and therefore become detucted from HER rental income I asume?
However... if she is then living there, the portion of the bills that she herself creates can not be considered allowable rental costs... so presumably somehow she needs to break the bills down into "her" and "tenants" to work out what cost to actually deduct from rental income?
Or am I overcomplicating things?
The costs applicable to her share of living costs would NOT be deductable as they would be personal costs and not rental costs."She would be allowed to offset against her rental income allowable rental costs that SHE incurs"
If she organises the services and pays the bills for gas, electricty, insurance etc etc etc presumably these become HER costs and therefore become detucted from HER rental income I asume?
However... if she is then living there, the portion of the bills that she herself creates can not be considered allowable rental costs... so presumably somehow she needs to break the bills down into "her" and "tenants" to work out what cost to actually deduct from rental income?
Or am I overcomplicating things?
The alternative of having her as a joint owner could trigger the Rent a Room scheme but Rent a Room should only relates to having one lodger in a house - not a bunch of tenants.
That makes sence I think.
Add the bills up Minus 1/3 and then deduct that from the rental income before filling in tax return for her income.
Looking on the gov website there are lots of things that ARE allowed... so she could potentially employ a cleaner (herself?) and deduct that from rental income...
Interesting comment re her being "joint owner" or just "living there"... Does the house HAVE to be in her name for the "owner living in" licensee agreement thing to work?
I had sort of assumed it was like a car... in that the "registerd keeper" is not neccesrily the "registered owner"...
Fun Fun!....
Add the bills up Minus 1/3 and then deduct that from the rental income before filling in tax return for her income.
Looking on the gov website there are lots of things that ARE allowed... so she could potentially employ a cleaner (herself?) and deduct that from rental income...
Interesting comment re her being "joint owner" or just "living there"... Does the house HAVE to be in her name for the "owner living in" licensee agreement thing to work?
I had sort of assumed it was like a car... in that the "registerd keeper" is not neccesrily the "registered owner"...
Fun Fun!....
Edited by tegwin on Thursday 27th May 12:04
As long as the personal element of these costs are removed from the equation. As she is living there, virtually all the costs will need some reduction to take into account the bit that relates to her. If there are four occupnats, then 3/4 of the costs would be allowed. If 3 occupants,, then 2./3 would be allowed and so on.
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