Tax Question

[Matthew]

Hi,

My friend asked me about renting his spare room out. It is a three bed flat and is thinking of letting one room out. I know he won't have to pay tax on the income as per the rent a room allowance (which it will be within), but I read that part (a third I guess) would fall due of capital gains tax.

My advice was as follows:

I think you are exempt for a period whereby no capital gains tax will be due as you have been living there 5 years already, think it may be three years, i.e. you could let your place for three years before capital gains tax would be applicable (assuming your only property). Your allowance would be approx £8,800.

>

>Ignoring the fact you may be exempt for 3 years, the way I think they would work it would be:

>

>Value at start of letting: £210,000

>Sale price, say 5 years later: £300,000

>

>Profit: £90,000

>

>A third of the property let, so £30,000 is due for capital gains tax.

>Less the £8,800, the figure would be £21,200. With your annual income, it would

>probably be taxed at 22%, so you would pay £4,664.

>

>So it is not too much to worry about, as this is probably worst case.

Am I right on this? Any advice apreciated,

I know Plym (sherena) is probably the only person likely to know the answer to this one.

Thanks in advance,

Regards,

Mat.

[plym77]

Hi Mat

Broadly speaking, if your friend rents out a room under rent-a-room (ie. furnished, income under £4,250, and the tenant lives as a member of the family - ie. use of the kitchen, lounge etc) then on the sale of the house, the room will not be taken separately, so if your friend is due PPR on the property, he will get it in full on the whole property.

I hope this helps

Kind regards

Sherena

[Matthew]

Ok, so he won't have to pay anything. That's great, i was a bit surprised when I read in the Times that by renting out one room to a lodger, part of your house would be chargeable to capital gains tax, a bit bizarre!

Thanks Sherena,

Mat.

[plym77]

i expect that was more to do with self-contained accomodation in your own home - for example a granny annex?

To put your mind at rest, it is in black and white, I refer you to:

HL Written Answer 27.1.93, Vol 514 col 94

... should you ever need the ref!

Regards

Sherena