Student Renting a House

[Arty]

Hello!

I am a student in the UK and I am starting a new 5-year course in the new academic year following the completion of my current one. My family are all abroad (I am not from the UK) and they were thinking of helping me to buy a house in the UK so that I can live in one room and rent the rest.

According to some investigation I made students are exempt from income tax for upto about £4,500 of the rent, if they also live in the property. Is that applicable to EU and overseas students as well, or just british ones. And what is the percentage charge if I do have to pay income tax on the rent (the total amount or the excess over the £4,500 if I am exempt from that)?

Also, what exactly is property tax and would I have to pay it being a student? Is it the same as council tax?

Thanks

[accountant@uktaxshop]

Arty,

There are two ways of doing this, both with different consequences.

Firstly you can buy the property in your name with your families help. In this way you will be liable for income taxes on the rental income, and possibly any capital gains tax on the sale.

A scheme called "rent-a-room" operates for letting rooms in your own house. This means that the first £4250 per year or rent is treated as tax free, and the rest at your marginal rate of tax. All individuals (including students) get an annual allowance of £4615 before they pay tax. This is ontop of the rent-a-room amount. Tax is then paid at 10% on the next £1,960, and then 22% on the next £30,500, rising to 40% for higher earners.

The tax you pay will therefore depend on both the rent and any other employment you have.

There is also an alternative basis of declaring the rental that may be used, which taxes the profit taking into account running costs of the house, which may be appropriate depending on your level of income.

On sale of the property if you have lived in it and let out under the rent a room scheme, there may be liability to any gains arising from increases in the property price. The gains are restricted by a couple of fairly powerful relief’s. Firstly the proportion of the property that you occupy yourself is exempt (Principle Private Residence - PPR) and secondly there is a relief known as "lettings relief" which matches your PPR up to £40,000. There are also some other relief available. You really need a worked example to show the effects under you specific circumstances to estimate if it is likely that any gains will arise.

Secondly you parents could buy the property in their names. There would be no CGT consequences on any sale in the UK - although there could be in their home country. On an income tax point of view there is still liability for the rent charged. Each owner of the property would need to declare their income, although the first £4615 of profit is exempt from tax as with any individual. In addition there are a number of relief’s available for example any mortgage interest relating to the purchase of the property can be offset against the rental.

As you can see this is a rather complex area, with more than one outcome, and the potential for some serious tax savings if you do it correctly. If you or your parents require some advice on setting up this rental for you please let me know.

Regards

James Smith
Chartered Accountant
www.uktaxshop.co.uk
01284 764436