Rent a Room scheme was introduced twenty years ago and still remains a very useful relief when you share your home with tenants. The move was initially made to encourage you as taxpayers to share your spare space. Twenty years on we still have a housing crisis, so the relief remains relevant. So, what is Rent a Room Relief?
With Rent a Room Scheme, you can earn up to £7,500 per year tax-free from letting out furnished accommodation in your home. Although the name suggests renting a single room, you can rent out as much of your home as you’d like.
If you share the income with your partner or anyone else, then the threshold is halved. In other words, each person would get a £3,750 tax exemption.
Who can use the scheme?
If you are an occupier of a domestic property and are letting out any spare space, then you would qualify for this scheme. You don’t have to own the property because as the main tenant you can sublet part of the property. But make sure you check the terms of your lease.
There are couple of other conditions to meet:
- you rent a furnished room to a lodger
- you run a guest house, B&B or other letting activity that amounts to a trade
Who can’t use the scheme?
As with most HMRC schemes, there are strict eligibility rules. You cannot use the Rent a Room Scheme if the accommodation is:
- not part of your main home when you rent it
- unfurnished
- used as an office or for business purposes
- in your UK home and is rented while you live abroad
- converted into separate flats
How do I claim the £7,500 tax exemption?
It depends on how much rent you receive. If the amount of rent you receive is less than £7,500 per year from letting the room(s), then the tax exemption is automatic. You don’t therefore have to declare it nor pay any tax on your profit.
If the gross profits are above £7,500 per year, you have a choice. You can either:
- Pay tax on your actual profit: Your actual profit is your total receipts minus any expenses and capital allowances.
- Pay tax on the amount exceeding the £7,500 limit: Your taxable profit would be your gross profit minus £7,500. If you choose this method, you cannot subtract expenses or capital allowances.
Either way you would need to register for self-assessment if you are not completing tax returns already.
You can get more information on how to contact HM Revenue & Customs (HMRC) and register for rent a room scheme here
It would be beneficial to calculate your profits using both methods and choose whichever method produces the lowest amount. You don’t have to stick with the same method each year, you can chop and change year to year by letting HMRC know.
So, if expenses in one year were large, it would be beneficial to opt out of the scheme that year. However do bear in mind there are restrictions to what qualifies as expenses against rental income.
HMRC will automatically use your actual profit to calculate how much you owe. There’s no set way to tell them that you want to use the scheme, you simply just tick the correct box on the Land & Property page of the Tax Return.
Alternatively, you may want to appoint a landlord specialist professional to complete your tax return for you. This way you get a peace of mind your tax obligations are covered.
You are can also rest assured that you are claiming the right expenses and getting the full tax relief you are entitled to.
In the current economic climate cash is tight for a lot of households. You may be looking to improve your bank balance. Have you considered letting out any spare room to give you the extra cash? Letting out any spare room you may have could be part of the solution.
Of course, you don’t make a decision like that lightly because after all you are sharing your personal space. But if cash is tight and you have the extra room, there is the opportunity to earn up to £7,500 without paying any tax.
One small warning, if you are living alone and qualify for the 25% reduction in Council Tax, you will no longer qualify for this discount.
If you are claiming any benefits you should check how those will be affected when renting out the spare room.
If you would like to discuss this or any other aspects to help you through these difficult times just get in touch. Email or call your normal contact at Myers Clark. If you are not yet a client, email Priya at priyar@myersclark.co.uk