As the Coronavirus continues to impact on household incomes, Sarah Laing points out that renting out a spare room can provide a tax-free cash boost.
The rent-a-room scheme is an optional tax exemption scheme, which allows individuals to receive up to £7,500 of tax-free gross income (i.e. income before expenses) from renting out spare rooms in their only or main home.
Broadly, as long as income is below the annual threshold, it does not need to be reported to HMRC. If income exceeds the threshold, it needs to be reported to HMRC via the self-assessment system.
Does it qualify?
Currently, in order to qualify under the rent-a-room scheme, the accommodation must be furnished and a lodger can occupy a single room or an entire floor of the house.
However, the scheme doesn’t apply if the house is converted into separate flats that are rented out. Additionally, the scheme cannot be used if the accommodation is in a UK home which is let whilst the landlord lives abroad.
An individual can opt in to the scheme at any time if:
- they are a resident landlord, whether or not they own the home;
- they run a bed and breakfast or a guest house.
The rent-a-room tax break does not apply where part of a home is let as an office or other business premises. The relief only covers circumstance where payments are made for the use of living accommodation.
Sometimes additional services are provided (e.g. cleaning and laundry). The payments for such services must be added to the rent to work out the total receipts. If income exceeds £7,500 a year in total a liability to tax will arise, even if the rent itself is less than that.
Tax options
Where the annual threshold is exceeded, there are two options available:
- the first £7,500 is counted as the tax-free allowance and income tax is paid on the remaining income; or
- the landlord opts to treat the renting of the room as a normal rental business, and prepares a profit and loss account using the normal income and expenditure rules.
In most cases, the first option will be more advantageous. The principal point to bear in mind is that those using the rent-a-room scheme cannot claim any expenses relating to the letting (e.g. insurance, repairs, heating).
Property allowance
The ‘property allowance’ allows individuals to receive gross income from property of up to £1,000 per year without the need to declare it to HMRC or pay tax on it. However, the allowance generally applies only in relation to income from a ‘property business’ that is not income under the rent-a-room regime. In practice, since the rent-a-room relief limit is considerably more generous than the property allowance this is unlikely to be a concern.
In addition, the property allowance is not available at all to an individual if they have a business which qualifies for rent-a-room relief, but they choose to disapply it. The intention is to prevent individuals from using the property allowance if they choose to deduct actual expenses in calculating the profits of another property business.
Safety first
Even though the tax rules for the rent-a-room scheme are different to the general property income tax rules, a resident landlord will still have certain responsibilities towards tenants, particularly in relation to safety.
For further information, visit the Gov.uk website.
Practical tip
Lodgers are treated as ‘excluded occupiers’, which means they can generally be evicted more easily than most tenants if they live with the landlord and share a kitchen, bathroom or other living accommodation with them. Unlike other tenancy agreements, the rules for lodgers have not changed during the Coronavirus outbreak. However, where a lodger has been asked to leave but believes they need to self-isolate, the government guidance asks the landlord to be flexible and willing to negotiate where possible.
