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  • Tax

    Tax implications of renting existing home

    Seven years ago I bought our home, my partner did it up and we've lived in it.

    Three years ago we bought a house together to do up and extend, it's nearly ready and we plan to move into it in the next month or so. I've been trying to sell our existing home and although there's quite a bit of interest, it's not sold yet, so I'm now mulling over the possibilities of renting it out for a year or two.  However there are surely some tax implications, firstly capital gains... It was bought for £142500 and had around £9-£10K spent on it to do it up and is now worth £195-200K.

    If I was to rent it out, would a capital gain have to be declared?  I don't have a mortgage on the house as it is owned outright, therefore there wouldn't be much of the way of expenses to go against rental income so most of the rental income would be liable for tax.

    Would it make sense to re-mortgage the house so that the actual net income is less, therefore less to be taxed on (or has this changed in recent years?)

    Any help that you can give me with regards to what I need to be aware of with regards to tax and other liabilities would be very much appreciated.

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    I'm not a tax expert but please read the attached link.

    https://www.gov.uk/tax-sell-home

    You really should seek advice from a tax adviser before you move and then make your decisions about selling and/or letting.

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    If you are not married then you just remain at the existing property

    Your partner can live in the other one

    Then you take in lodgers

    You are supposed to declare to HMRC any income in excess of £7500

    It is suspected that many homeowners with lodger income in excess of £7500 don't advise HMRC

    Very naughty!

    But then HMRC have little way of knowing what lodger income a homeowner receives providing it is not welfare HB

    Just ensure you visit your property at least once a month to be compliant with your result insurance policy

    You may keep lodgers at your official PPR for as long as you wish and when you eventually sell it you will NOT be subject to any CGT

    But if you get married and you choose not to live at your PPR then you will have to issue a tenancy agreement and then CGT when you sell though you will ve able to claim lettings relief and the last 18 months of any gains

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    I agree with Paul's comments but for the purpose of Private Residence Relief on Capital Gains Tax you are limited to 1 lodger.

    If you are not married or in a civil partnership it may be possible to nominate 1 home each as your Main Residence - I don't know if this is still possible if you both have your names on both Title Deeds.

    If you and your partner move into your new home, you may be have to pay CGT when selling your old home, whether you rent it or not, although you will get relief for the last 18 months and there is also letting relief available. My other concern is that if you move and claim PRR on your old property you may have to pay CGT at some point on the increase in value of your new property from when you bought it to when you moved in, but there are other reliefs available.

    If you don't have a tax adviser, Rita4Rent is a sponsor of this site and will be able to advise.

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    Gary,

    I'm fascinated by the new info you have mentioned.

    It has been my understanding for the past 40 years that any PPR that has had any number of lodgers previously or existing does not cause that PPR to lose any of its CGT allowance of 100% tax free gains if and when it is sold as a PPR.

    Would you advise as to where the information has come from to make you believe this is no longer the case.

    It will be news to most homeowners who let out rooms to lodgers.

    If what you state is correct then most homeowners will wish to reduce any lodgers to 1.

    It clearly would be pointless taking on more than 1 lodger if the PPR CGT free status would be compromised by more than 1 lodger.

    Perhaps there has been a change to the RFR circumstances since the increased RFR allowance.

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    If you are not married then you just remain at the existing property

    Your partner can live in the other one

    Then you take in lodgers

    You are supposed to declare to HMRC any income in excess of £7500

    It is suspected that many homeowners with lodger income in excess of £7500 don't advise HMRC

    Very naughty!

    But then HMRC have little way of knowing what lodger income a homeowner receives providing it is not welfare HB

    Just ensure you visit your property at least once a month to be compliant with your result insurance policy

    You may keep lodgers at your official PPR for as long as you wish and when you eventually sell it you will NOT be subject to any CGT

    But if you get married and you choose not to live at your PPR then you will have to issue a tenancy agreement and then CGT when you sell though you will ve able to claim lettings relief and the last 18 months of any gains


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    Gary,

    I'm fascinated by the new info you have mentioned.

    It has been my understanding for the past 40 years that any PPR that has had any number of lodgers previously or existing does not cause that PPR to lose any of its CGT allowance of 100% tax free gains if and when it is sold as a PPR.

    Would you advise as to where the information has come from to make you believe this is no longer the case.

    It will be news to most homeowners who let out rooms to lodgers.

    If what you state is correct then most homeowners will wish to reduce any lodgers to 1.

    It clearly would be pointless taking on more than 1 lodger if the PPR CGT free status would be compromised by more than 1 lodger.

    Perhaps there has been a change to the RFR circumstances since the increased RFR allowance.

     I like to think I'm pretty much on the ball when it comes to knowledge about the RFR situation.

    But I am very mindful of what Vanessa states about none of us know as much of all of us.

    So I fully accept that this vital information may have slipped past me!!

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    Paul,

    The link below provides details and does state that having more than one lodger may give rise to a CGT liability.

    https://www.gov.uk/tax-sell-home

    Mike


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    Haven't read the link yet..

    But my immediate reaction is I am somewhat gobsmacked to say the least!

    It seems that for over 45 years I have misunderstood a fundamental tenet that irrespective of how many lodgers you had in your PPR you could sell free of CGT.

    I was aware that if you claimed for office expenses etc at your PPR that this could cause some CGT liability.

    But I have always understood that irrespective of how many lodgers you have it would not affect the tax free CGT status for your PPR.

    This is very important as I know it is discussed at length on PT that taking in lodgers is an excellent way to generate cash for deposits etc.

    Lodgers have always been mentioned, not just 1 lodger.

    No mention by anyone has ever been made that there could be CGT liability if you have more than 1 lodger.

    I believe that later in the year there will be Govt moves to change how the RFR process works.

    But as far as I am concerned currently if I have a 3 bed house and wish to take on 2 lodgers then I may do so with no CGT liability whatsoever!

    It seems I may well be incorrect!

    So of course the real experts on this very important CGT issue is of course

    RITA

    Would be great if they could comment on this lodger situation..

    I must say Gary has scared me big time!

    Unless I'm told it isn't the case I am going to ensure I only have 1 lodger.

    I simply couldn't risk being stung for CGT on a PPR for having the temerity to take in two lodgers.

    There must be very many homeowners who currently have more than 1 lodger and who are unaware that they may be storing up a CGT liability on their PPR..

    There is simply no way it would be worth taking on more than 1 lodger if CGT occurred for more than 1.

    Lodger income would pale into insignificance compared to the losses CGT could cause.

    More a SE problem I accept.

    If this CGT issue is the case I can see many home owners having to reduce their lodgers to 1 to avoid any CGT possibility.

    I appreciate this may be a storm in a teacup, but as far as I am concerned my understanding of this has been shaken to the core.

    Hopefully I have misunderstood things and that my example of a 3 bed PPR with two lodgers wouldn't ever suffer CGT liability.

    The only true voice that will rest my mind is that of RITA.

    They must be the go to operation who know more about LL property etc than anyone else.

    I hope they can put my mind at ease!

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    Paul, I am no expert on this, but have thoroughly read the government guide and attached a link - section 6.3 covers CGT.

    https://www.gov.uk/government/publicatio...-landlords

    The rent a room scheme gives an additional allowance against income tax, but there is no mention of any allowance against capital gains tax.

    As I understand it:

    • 1 lodger has no effect on CGT and you gain an additional income tax allowance, usually sufficient to cover the income.
    • 2 lodgers may lose you a proportion of private residence relief and you will probably need to pay some income tax - this appears to be down to the integrity of the resident landlord and what they declare. In some areas an HMO licence may be required if you have 3 unrelated tenants although the Rent a Room guide indicates this is only if you have more than 2 lodgers.
    • 3 lodgers doesn't appear to have any effect over 2, but may clarify the HMO discrepancy for 2 lodgers.
    • 4 lodgers and above will require an HMO licence and I'm sure would alert the interest of HMRC with regard to income tax and capital gains tax.
    • It may also be of interest that a resident landlord does not have to live at the property permanently, but "only a court can say for certain whether a landlord has maintained enough residence in the property to count as a resident landlord" Section 1.3 of the attached document.

    As always, I'm happy to be corrected.

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    I still can't see how much a LL makes out of a PPR would render any CGT liability whatsoever.

    Yes any amount above £7500 would be liable for income tax.

    But as far as I can see the amount of lodger income earn't doesn't affect CGT liability of a PPR providing that the LL is conforming to PPR occupancy requirements.

    Irrespective of any HMO circumstances it still doesn't cause a CGT liability.

    This as RFR facilitates lodger income with no CGT liability.

    It doesn't matter whether HMRC know you have 4 unrelated lodgers in a 5 bed property providing the LL lives in the property as a PPR I don't see any tax advice that indicates ANY CGT liability.

    Of course if the LL doesn't live there then it becomes a fully liable tenancy.

    Though mortgage fraud would be occurring if a LL had a mortgaged 5 bed property and wasn't living at the property.

    But I still maintain that it is irrelevant how many lodgers a live in LL has there is still no CGT liability.

    A PPR is CGT free irrespective of how many lodgers occupy.

    If I am wrong there will be many homeowners who take in more than 1 lodger who will be unknowingly  building up CGT liability for their PPR.

    It appears the HMRC advice sheets are somewhat ambiguous and I remain unconvinced that having more than 1 lodger causes a CGT liability.

    Academic for me currently as I don't have any lodgers.

    But it would be useful for some tax advice regarding this possibly tricky situation.

    I'm sure the millions of homeowners who currently have more than one lodger household would be very interested in also knowing what the exact situation is.

    The whole point of the RFR scheme was to facilitate and encourage private homeowners to take in lodgers.

    Nothing in the RFR leaflets I have from 40 years ago indicates that any CGT liability would occur if lodgers were taken in.

    But I suppose this possible CGT liability could be tucked away in some innocuous part of HMRC regulations.

    I think I might see if Shelter have any info on this..

    This because private homeowners do provide shelter , but won't if they discover that they are building up a CGT liability if they take on more than 1 lodger household.

    Or rather they will reduce their lodgers to 1 lodger household.

    That won't assist anyone!

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