Letting rooms

[sammd]

If you buy a house, live in one of the bedrooms and rent the others out, do you still pay tax on the income? Do you have to tell the tax man you're renting the other rooms and will he find out if you don't tell him?

Also, what are the implications if you move out at some point so you're renting all of the rooms - because you won't originally have a buy to let mortgage?

[gammaray]

If your renting out rooms you should do two things. register with the inland revenue and tell your mortgage company.

You will pay tax (25%) on any money you take off your tennants. The implications of not declaring this extra income and then being found out are very serious.

You will need to inform your mortgage provider because you may well be operating outside the scope of your mortgage agreement. This should be done even if you are living at the same property as your tennants.

[sammd]

I see. Are there any leaflets online about it?

[sammd]

I thought you only pay tax (at 20%) on any profit you make...

[gammaray]

It's 25% straight off the top i'm afraid, and it's on the turn over not profit. You can always claim for expenses etc when you fill in your return. this will lessen your overall tax liability.

[gammaray]

There may be slight variations in tax from second income as opposed to being self employed. The revenue will give you the full SP.

[kags]

Have a look at this site, it gives loads of hints and advises on the implications for council tax etc.

http://www.brent.gov.uk/phiu.nsf/0/5decb79275fff25f802569e70036b6e8?OpenDocument

You are not taxed at 25% on gross rents, you may either claim under the rent a room scheme for exemption on rents up to �4250 a year, with the excess taxable at either 22% or 40% if you pay higher rate tax, or you may elect to pay tax only on the profit you make, as calculated for tax purposes.

The advice given above about notifying your mortgage lender is very important, and also you must check out the implications with your insurer.

[sammd]

I'm confused about being taxed on profit. Would profit be the rent minus the mortgage and the bills? Or is the mortgage payment not counted as an expense?

[gammaray]

fair do's Kags. I see things in terms of self employed which has different rules about profit, turnover and tax deductable entries on the return. As a rule of thumb you are advised by the revenue to syphon off 25% of T/O into your tax account.

[sammd]

Ah i see, thanks.

[kags]

To work out your profit, you need to deduct a proportion of the running expenses of the property that you pay yourself, from the rent you receive. You can deduct a propertion of the mortgage interest, but not any capital repayments. You will have to work out the appropriate proportion yourself, and agree this with Customs and Revenue. Alternatively, as mentioned above, if the total rent is less than �4250 then you can claim exemption from tax under the rent a room scheme. If it is more than �4250, you can claim to be taxed on the gross rents exceeding this amount only. This may be preferable if the rents only just exceed the �4250,

[kags]

sorry, I was cut off there!

I was going on to say that for rents only just exceeding the �4250, you might prefer to just pay tax on the excess rent, this saves preparing an income and expenditure schedule, and may result in less tax payable.