Question about having a lodger and paying tax

[Question1001]

Hi

Am I right in thinking that I don’t need to declare how much I get from my lodger as long as it falls beneath the 7.5K tax threshold?

Also, she comes from abroad and every month she transfers more than she needs to to my account, and I take out the surplus that she has given me and give her that amount in cash - she does this to avoid onerous exchange rates.

However, were HMRC to look at my current account, it would look like I am due to get more than 7.5K a year - though they could also see the transaction where I withdraw the cash for her.

So my question is - should I ask my lodger only to transfer the rental amount and to stop transferring more so that I can take cash out for her? I know she kind of relies on this as she is very aware of exchange rates were she to use her own debit card to get cash out for example.

Thanks .

No idea on the legalities but that sounds dodgy. If you give her cash there is no way of proving it.

Yes, you are correct. She should only pay in her rent to keep it under the £7,500 threshold. Take a look here:

www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme

I'd be worried about money laundering too.

I'm not implying your lodger has money from less than legitimate sources but if a financial institution investigated your account you may find it hard to prove that you weren't laundering money or seeking to deprive HMRC of tax.

Overpayment then refund is one of the simplest ways to launder money.

Yes on the surface it looks like money laundering. That's what I would be worried about. Can she not get a card that pays no exchange fee?

The exchange rate thing sounds like a red herring; if the exchange rate was bad and she transferred more, then she would lose more, or you would make up the gap, or something (I think).

Like others have said, it's more likely that she's money laundering, or scamming her employer? Eg if she is working over here and here employer is paying her rent, she tells her employer that her rent is (say) £800 pm, but due to the 'cashback' it is actually £600, she makes an extra £200 pm at her employer's expense.

Yes, you should ask your lodger to only transfer the actual amount due. You could say that the tax office is cracking down on lodger income and you have to submit bank statements and will pay extra tax if the amounts don't match up?

Or maybe offer to help her find a cheaper way of transferring money if that's what she says the reason is? If she doesn't take that idea positively, that does suggest she's lying to you about the reason.

But definitely try to end this arrangement. If it is money laundering, you are just as guilty as her. There's a lot of this about at the moment - innocent people including school children being tricked into money laundering by allowing 'friends' to move money through their bank accounts for spurious reasons.

Thanks a lot. Definitely not money laundering but extremely frugal and aware of exchange rates. I will tell her (after this month) to only transfer the rental amount. She won’t be happy but not sure what else I can do!

She has looked around for other solutions and obviously doesn’t like them but she might have to accept what’s out there.

Definitely not money laundering

It's great that you honestly believe that's the case...however if someone were to investigate you, your lodger's word that the money is legitimate won't have any weight at all and the onus will be on you to prove you haven't entered into illegal money dealing or risk having all your bank accounts suspended, even then if they suspect you they'll probably shut your accounts. Banks can do this based on suspicion and lack of faith in you as a customer and they will not change their mind in most cases because the penalty if they don't identify monetary fraud is massive. It's far safer for them to just shut you down at the first sign of doubt.

Glad to hear you're stopping the overpayment. Please make this a decision with immediate effect. If your lodger overpays you "accidently", do not give them any money back in cash. Just transfer straight back to the originating bank account.

It's probably safer to get the right amount paid.

From a tax point of view, there is nothing from with what you are doing but it is difficult to evidence your position and an HMRC Inspector would probably think your are just making that story up after being caught.

I think people are over reacting a bit on the money laundering front. If you know enough about her circumstances to be comfortable about nothing dodgy is going on and we are only talking about a few hundred quid a month, the risk is minor. Nobody is going to be interested in trivial financial arrangement between people who live under the same roof.

Is she even staying in the country legally?

Why doesn't she have an account here? She could transfer into her own account whatever she likes and then pay you the rent due.

It almost sounds like she's potentially illegal so the money comes from abroad, you give her cash back and there's no trace of her even being there.