Q Please can you clarify for me whether I am likely to be required to pay capital gains tax on my rental income when I decide to sell my house? I plan to have two lodgers while still living in the property. It is my only house.
Is there any relief that would apply to me now or in the future that I should look out for?
KR
A No, you won’t be required to pay capital gains tax (CGT) on your rental income but depending on how much income you get, you may have to pay income tax. Under the rent-a-room scheme, as a resident landlord, you can earn up to £7,500 a year tax-free from letting furnished accommodation in your home to lodgers. If you get more than £7,500, you’ll have to pay income tax on the amount over £7,500 and you’ll need to give details of the income on your tax return (which will also enable you to claim the tax-free allowance). If you share the rental income with someone else, you each get an allowance of £3,750 a year.
When you come to sell your home, the gain on the part of your home that is used for letting is liable to CGT because you will have had two lodgers. How much of the gain is taxed is based on the percentage floor area let and the amount of time the property was let for as a proportion of the total amount of time you owned the property. There would be no need for such a complicated calculation if you had had only one lodger at a time. Having a single lodger does not count as letting your home for business purposes whereas having two or more does.
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