Sarah Laing reminds readers how the rent-a-room scheme can be used to obtain tax-free income.
HMRC’s rent-a-room scheme is an optional exemption scheme, which allows individuals to receive up to £7,500 of tax-free gross income (income before expenses) from renting out spare rooms in their only or main home. The exemption is halved where the income is shared with a partner or someone else.
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.
2019 changes put on hold
The emergence and growth of peer-to-peer online marketplaces and digital platforms (e.g. Airbnb) has made it significantly easier to advertise rooms and put those with spare accommodation in touch with a national and global network of potential occupants. HMRC believe that this type of income should not be eligible for rent-a-room relief but should instead be taxed under the normal rental property business rules.
Consequently, during 2018, HMRC worked on proposals to introduce a ‘shared occupancy’ test. The test would provide that the individual, or a member of their household, in receipt of income, must have a ‘shared occupancy’, a physical presence for all or part of the period of the rental, with the individual whose occupation of the furnished accommodation is generating receipts.
Although it was intended that this change would take effect from 6 April 2019, the government announced in the Autumn Budget 2018 that, in order to maintain the simplicity of the system, the legislation would not be included in Finance Bill 2018/19. Therefore, the rules currently remain unchanged, and rent-a-room continues to provide a valuable exemption in many cases.
Qualifying accommodation
As the legislation presently stands, 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 into 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 the circumstance where payments are made for the use of living accommodation.
Sometimes additional services are provided, such as 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.
Options for tax
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, working out 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 £1,000 property allowance, which was introduced for 2017/18 onwards, generally applies in relation only to income from a property business that is not income under the rent-a-room regime.
Practical Tip
Claiming rent-a-room relief may not always be the best option. If rental income exceeds the annual threshold and expenses also exceed the threshold, computing rental profit in the normal way will give a lower taxable amount. It might also be beneficial to opt out of the scheme where losses arise; otherwise, the benefit of the loss is lost and cannot be carried forward for offset against future rental profits.
