Rent-a-Room relief: how it works

Letting out part of the property which is your only or main home is a great way to boost your income, but you have to be aware of the tax implications that come with being a resident landlord. Rights and responsibilities include:

  • – Keeping the property safe and in good repair
  • – A tenant or lodger cannot challenge the agreed rent
  • – You can give less notice to end the letting than if you were renting the whole property.

Under the Rent-a-Room scheme you may also be able to earn £7,500 a year tax-free (£3,750 if you share the income with someone else). It’s important to make sure that you’re making full use of your tax free-allowance and calculating your receipts properly.

Rent-a-room receipts can be for than just the rent you’re charging for the use of a furnished room in your house/apartment: you can also include receipts for related goods or services supplied, eg meals, laundry, cleaning services.

Whilst receipts will on the whole be treated in the UK as part of a property business, in some cases they can be treated as trading income.

Is your property a ‘residence’?

The term ‘residence’ includes

  • – A building (or part of a building) with someone living in it
  • – A mobile home such as a caravan or houseboat

It may also include a building (or part of a building) which has been divided into separate residences, however in this case it is still treated as a single residence

If you let a room out as an office (or for another business purpose eg storage), the room-to-rent relief won’t apply.

How does it work?

How much relief you can use is dependent on the total rent-a-room amount you receive: if receipts in a tax year equals (or is less that) the individual limit, receipts will be treated as nil and won’t be considered when calculating your tax payments. Similarly, if you have made a loss, you can make an election to disapply (that is, the receipts won’t be considered).

However, if the receipts exceed your individual limit, you will be assessable to income tax.

You can choose how these receipts are assessed:

  • – The alternative method: This only considers rental income, any associated expenses are excluded. This method taxes the total rent-a-room receipts (less your £7500 or £3750 limit) and is subject to an election.
  • – The default method: This is calculated as it would be in any property letting businesses, that is, total rental income minus associated expenses.

Other things you’ll need to consider

For individuals, there is a £1,000 tax-free allowance which was introduced to make it easier for people to make a small income from renting out/sharing their property. However, if you’re already receiving rent-a-room relief, you’re not eligible for this allowance.

Currently, the cash basis is the default way of reporting rental income and expenses of a property business (as opposed to accrual accounting), and applied when cash receipts are under £150k in a tax year.

Choosing how to be assessed

If your gross receipts from your rental are less than your limit, or you want to be assessed on the alternative method, you need to make an election. This needs to be made via your self-assessment tax return on or before 31st January following the year of assessment. You can withdraw the election within this time frame.

If you’ve elected for the alternative method, this will continue for following years until it’s withdrawn.

If you need advice about the best way to deal with your rent-a-room receipts, get in touch and let us help!

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