The rent-a-room scheme is a tax scheme that applies where furnished accommodation is let in the taxpayer’s only or main home. It allows the taxpayer to enjoy the associate rental profits tax-free provided that total receipts from the letting are no more than £4,250 in a tax year.
The scheme does not apply only to receipts from letting the room. It also covers money earned from the provision of associated services, such as meals or laundry.
In the event that gross receipts (i.e. before the deduction of expenses) exceed £4,250 in the tax year, the taxpayer has a choice how he is taxed. The simplest method is for the excess over £4,250 to be taxed, without any further deduction for expenses. Alternatively, the taxpayer can be assessed on the actual profits (i.e. actual receipts minus actual expenses) if this produces a lower result.
The scope to make use of the rent-a-room relief is wide. It applies to individuals who derive an income from providing furnished accommodation (or goods and services in connection with that accommodation) in their only or main home.
The scheme covers income from lodgers. It can also be applied to the provision of bed and breakfast or guest house accommodation (which is normally assessable as trading income) provided that the house in which the business is carried on is also the individual’s only main residence and the normal rent-a-room conditions are met.
This can be particularly useful if the taxpayer does not want a permanent lodger but instead wishes to capitalise on occasional demand for local accommodation, for example as a result of a nearby sporting event. Those living in the vicinity of Wimbledon, for example, may offer bed and breakfast accommodation only during the Wimbledon fortnight.
If the taxpayer has more than one home, the scheme only applies to accommodation provided in the taxpayer’s only or main home.
The scheme also applies to caravans and houseboats, provided that this is the taxpayer’s only or main residence, as well as to accommodation provided in houses and flats. However, it does not apply if the room is let other than for a residential purpose, for example as an office or for storage.
If more than one person receives income from letting accommodation in the same property, the tax-free limit is reduced to £2,125 per person.
Using the scheme is simple. Where rent-a room is claimed, the taxpayer must enter this on the self-employment pages of his or her self-assessment tax return. If receipts exceed the rent-a-room limit and it is not beneficial to claim the relief, receipts and expenses are returned as for any other business.
It is not often the Government gives taxpayers an opportunity to earn up to £4,250 a year tax-free and for those looking for ways to make a little bit of extra money it is at least worthy of consideration.
Sarah Bradford
