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Tax on rental income for converted basement

Can client claim rent a room relief on self contained basement let through Air B&B.

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Hi, I have some clients, a married couple, who have converted the basement of their home into a self-contained flat with a separate entrance. They are renting this out through Air B&B.

The rental property will meet the Furnished Holiday Let (FHL) requirements regarding number of days let/available. The flat does not have a separate Council tax bill

The only time I’ve come across similar situations is where clients rented out a completely separate property e.g. a cottage attached to their main property with its own council tax rating. Or when clients have rented out rooms in their house but with a shared entrance/facilities.

Therefore I have two questions:

1. Can my clients claim rent a room relief?

2. If not then the rental income will be treated as per any other FHL income in which case they can split the income how they like e.g. 100% could go to the wife?

Thanks, in advance

 

Replies (24)

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By Tax Dragon
24th Sep 2020 10:14

Have a read of PIM4004 and come back with the questions that this might raise in your mind.

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Replying to Tax Dragon:
Tony s
By Tony S
24th Sep 2020 11:13

Thanks for you reply.
The temporary issue is interesting. Unfortunately my client is a bit evasive when I have asked him for more detail, but what I have managed to glean from him is:

The flat does not have separate meters for utilities.

The entrance, although separate, is down some steps and through the client’s garden. Further work would therefore be necessary to permanently spit the property if for example they wanted to just sell the basement.

The basement has always been accessed from the outside; the house is built on a hill. There has never been access to the basement from inside the house. Therefore structural alterations would not be necessary to undo the division.

Long term my client has suggested his mother in law would probably move in as a granny flat.

Given these considerations I would think Rent a Room Relief is claimable??

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Replying to Tony S:
By Duggimon
24th Sep 2020 11:32

Tony S wrote:

The basement has always been accessed from the outside; the house is built on a hill. There has never been access to the basement from inside the house. Therefore structural alterations would not be necessary to undo the division.

I would disagree with that and say it sounds more like the basement has always been separate, and structural alterations would be required to make it not so.

I think I still agree rent a room applies though. While the basement is and always has been physically separate, the plumbing, electricity, heating etc are all a part of the residence and significant work would be needed to make it a separate property in its own right.

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Replying to Duggimon:
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By Tax Dragon
24th Sep 2020 12:57

I wonder...
...what the conversion work actually entailed
...whether MDR applied (or would have applied) on purchase
...whether that last point (MDR) is remotely relevant.

The statute says: "If a building, or part of a building, designed for permanent use as a single residence is temporarily divided into two or more separate residences, it is still treated as a single residence."

Basil has told me off for focusing on the word "designed" in another context. In this context, it feels like one of the right words to be honing in on.

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Replying to Tax Dragon:
Tony s
By Tony S
24th Sep 2020 14:57

From what the client says it was a basement, traditionally just used for storage and laundry. It’s always been classed as part of the house even though you couldn’t access it from inside the house.
The conversion basically involved making it habitable i.e. installing a bathroom, kitchen and decorating throughout.

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Replying to Tony S:
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By Tax Dragon
24th Sep 2020 15:10

In my mind I had a converted garage (there are houses around here with garages where basements might be... it's really quite varied).

They'd need to take further 'separation' steps, I reckon, before it became an issue.

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Replying to Tony S:
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By dmmarler
28th Sep 2020 11:22

I note the inclusion of a bathroom and kitchen to the basement. Have building regulations been complied with? With a basement converted into what is effectively a dwelling building regs certificate would be essential. All local authorities are getting rather jittery around changes which could cause a fire risk ... yet alone the usual requirements for correct installation of kitchens, bathrooms and their connection to the public sewers and water supplies. Planning is yet another matter. No - rent a room does not apply without full access to the house.

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Replying to dmmarler:
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By Tax Dragon
28th Sep 2020 11:52

dmmarler wrote:

No - rent a room does not apply without full access to the house.

a) what are you basing that on and
b) what does it mean?

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Replying to Tax Dragon:
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By dmmarler
29th Sep 2020 19:37

The rent a room relief can be an entire floor of a house, but it does not apply where it has been converted into separate flats. From the description the basement has been converted into a separate flat as its only access is from the outside of the building and it has all the amenities of a dwelling. Furthermore the rent a room relief expects the room or series of rooms to be furnished. I do not know whether this applies in this instance. From the description we have been given, rent a room relief does not apply.

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Replying to dmmarler:
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By Tax Dragon
30th Sep 2020 07:22

It's an FHL. Hence F.

You haven't said what you are basing your comments on. You might benefit from reading the law - esp s787(2) - HMRC's interpretation of the law in PIM4004 and more generally around the issue of what constitutes a residence (eg CGM extracts as discussed below).

We're told (and, looking at houses near me, I can believe it) that there never has been internal access to the basement. It didn't stop it being part of the residence before the sofa bed was installed. Why so after?

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By JD
28th Sep 2020 09:38

Is the basement separately council taxed ?

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Replying to JD:
Tony s
By Tony S
29th Sep 2020 10:25

nope

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Replying to Tony S:
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By Tax Dragon
30th Sep 2020 07:20

It's almost as if some people don't read the OP before they post.

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By The Dullard
29th Sep 2020 11:00

HMRC take the view that there's just one big dwelling house:

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64300

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Replying to The Dullard:
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By Tax Dragon
29th Sep 2020 11:25

Yes, but the rent-a-room test is similar but not quite identical. RaR wouldn't apply, for example, to a room in the gardener's cottage, because that's not part of the "building" in s787(1), though it might be part of the dwelling-house.

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Replying to Tax Dragon:
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By The Dullard
29th Sep 2020 11:30

Oh, so the basement is in the gardener's cottage. Sorry, my misunderstanding.

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Replying to The Dullard:
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By Tax Dragon
29th Sep 2020 11:36

No (I've missed your sarcasm, btw), but the meaning of "dwelling-house" has been considered at length by the courts and informs HMRC's views expressed in the CG manual. Its relevance to RaR therefore needs to be established.

The relevance to this thread of the PIM extract referred to above, on the other hand, does not need to be explained or demonstrated.

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Replying to Tax Dragon:
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By The Dullard
29th Sep 2020 12:08

Is a building intended to be occupied as a residence, not a dwelling house (as opposed to a caravn or houseboat, say)? Can the rules for what is and what isn't a dwelling house in one context not be used to establish what is and what isn't a building intended to be occupied as a residence in another; subject, of course, to there just being the one building. Unless of course the irrelevant extract is in some way at conflict with the purported relevant extract.

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Replying to The Dullard:
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By Tax Dragon
29th Sep 2020 12:30

Honestly? I don't know. It's possible, but...

The Dullard wrote:

Is a building intended to be occupied as a residence, not a dwelling house...?

Is that a definition the courts have provided?

Seems to me (in my simple approach... I like simple) that you could get RaR and lose OMR, or qualify for OMR but not RaR, depending on the facts. So flipping from one relief/exemption (and its tests and definitions) to the other (and its) and back again seems (to me) to invite errors. For me, it confuses rather than clarifies. If you (the OP and others) find the reverse, then... flip away.

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Replying to Tax Dragon:
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By The Dullard
29th Sep 2020 16:53

Tax Dragon wrote:

Is that a definition the courts have provided?

No, actually it's from the (RaR) legislation, which applies to "buildings (or parts of buildings) which are used or intended to be used as a separate residence", as well as caravans and houseboats.

Forget about OMR; it isn't relevant, I just happened to take an extract from an HMRC manual dealing with it.

What is relevant is what the Courts have considered a dwelling (which, typically, is a building - or part thereof - suitable for use as a residence).

My point, and my only point, is that the Courts have concluded (and HMRC have adopted in their manuals) that the starting place for that analysis is the whole building, unless there are clearly multiple residences in the building.

It's not flipping at all. It's expansion of the same point.

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Replying to The Dullard:
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By Tax Dragon
29th Sep 2020 18:02

Then I'm happy. As long as you disagree with dmmarler's unsubstantiated assertion (which I have since interpreted - rightly or wrongly - as "the tenants have to have a key to the non-basementy bit of the house").

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Replying to Tax Dragon:
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By The Dullard
29th Sep 2020 23:03

Of course I agree. After all, I imagine many a lodger will have asked for a lock on their accommodation and fair's fair.

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By dmmarler
30th Sep 2020 12:06

If you check out S787(2) of the Income Tax (Trading and other Income) Act 2005, the test for a residence for the purpose of the legislation is "If a building, or part of a building, is designed for permanent use as a single residence is temporarily divided into two or more separate residences, it is still treated as a single residence." From this and the description of the installation of a kitchen and bathroom in the basement space, I would regard as a permanent division of the building into two households. This is why I would take the view that there needs to be some connectivity between the main part of the house and the basement flat to show it is a "temporary" division. This could be very relevant if the flat were to be used for an elderly relative at some time in the future. I still maintain that there are building regs, planning, mortgagor's consent, insurance and other matters which need the client's consideration and which could cost a lot more than the tax element of this. Furthermore, on the tax front we should remember HMRC wanted to tighten up the "shared occupancy test" but this was dropped from the 2019 Finance Bill; I have no doubt it will be brought back at some time in the future.

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By C.Y.Nical
30th Sep 2020 16:10

Does anyone know of a reported decision in a dispute between HMRC and a taxpayer about whether Rent a Room relief applied because of disagreement about whether the physical layout of the property disqualified the claim?
I know about PIM4004 but that seems to focus above all on whether the division is temporary. It doesn't say much about the relative weight to be attached to the several factors which apply to questions about the physical layout. A reported decision might help us to understand this better.

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