If you sub-let a furnished room within your home to a lodger, the ‘Rent a Room’ scheme is well worth looking in to. The scheme allows the homeowner to receive up to £7,500 tax-free rental income if certain conditions are met.
The annual limit for the tax years 2018/19 and 2019/20 is £7,500. If the income and subsequent profits are split between two people the limit reduces to £3,750.
Where can ‘Rent a Room’ tax relief be used?
You can use the scheme if:
- You let a furnished room to a lodger.
- The room being let is in your main home.
When can ‘Rent a Room’ tax relief not be used?
- The room being let is not part of your main home when you let it.
- The room is not furnished.
- The room is used as an office or for any business purpose.
- The room is in a UK home and is let whilst you live abroad.
How does ‘Rent a Room’ tax relief work?
If the gross receipts relating to your letting are less than the £7,500 limit (or £3,750 if split between two people)- you won’t pay tax on your profits.
If the gross receipts are higher than the limit of £7,500 – you may still benefit from the scheme.
What are ‘gross receipts’?
For the purposes of this scheme, gross receipts include:
- Rental income, before expenses.
- Amounts received as consideration for meals, goods and services provided as part of the tenancy – i.e. cleaning, laundry and utilities (gas/electric).
Gross receipts are normally calculated for the tax year which is 6 April – 5 April.
Which method should I use?
If your gross receipts are less than the Rent a Room limit, you are automatically exempt from being taxed on that income. You will not need to do anything for the exemption to apply; it will apply automatically unless you ‘opt out’.
If your gross receipts from the letting are more than the £7,500 (or £3,750) limit, you can choose which of the below methods to use when working out your tax.
Method 1:
Pay tax on actual profits – this is your total receipts less any allowable expenses and capital allowances.
Method 2:
Pay tax on your gross receipts over the Rent a Room limit. I.e. your gross receipts minus £7,500. Under this method you cannot deduct any expenses or capital allowances.
What do I need to do?
HMRC will automatically apply ‘method 1’ and use your actual profits to determine the tax you pay on the rental income.
Should you wish to pay your tax under ‘method 2’, you need to tell HMRC within the prescribed time limit. The time limit is within one year of 31 January following the end of the tax year in question – we’ll give an example below!
Once you have informed HMRC that you wish to apply the Rent a Room relief – ‘method 2’, you will continue to pay tax based on this method until you inform HMRC that you wish to revert to paying tax on actual profits – ‘method 1’.
It is useful to know, that you can change between each method on a yearly basis, but you must ensure that you inform HMRC within the time limit.
Example 1
Wendy rents out a furnished room in her main residence. She charges her lodger £1,000 a month and receives contributions towards cleaning. Her gross receipts for the tax year commencing 6 April 2018 and ending 5 April 2019 are £12,500 (£12,000 rent plus £500 contribution towards cleaning).
Wendy’s allowable expenditure incurred in relation to the letting of the room equates to £6,000.
If Wendy uses method 1, she will pay tax on profits of £6,500 (£12,500 – £6,000).
If Wendy uses method 2 i.e. gross receipts over the Rent a Room limit, she will pay tax on £5,000 (£12,500 – £7,500).
In this scenario, it is more tax efficient for Wendy to utilise the Rent a Room scheme – ‘method 2’. She will therefore need to inform HMRC that this is the case and the time limit for doing so is by 31 January 2021. In practice, however, Wendy would simply tick the relevant box on her tax return (to be filed by 31 January 2020) to apply the relief.
Example 2
Sid lets a room in his home at a rate of £140 per week. His gross receipts for the tax year therefore total £7,280. Because his gross receipts are less than the current Rent a Room limit of £7,500, the income is automatically exempt from tax and Sid won’t need to file a tax return due to receiving this income.
Other considerations:
Moving home during the year
If you move your main residence during the year but let a room in both the old and the new home, you simply total the gross receipts for the year. As above, if the total gross receipts are below the limit, you do not pay tax on the letting.
The letting period is less than a full year
The £7,500 limit is not apportioned, it remains the same even if you let the accommodation for less than 12 months.
Creating a loss
If you use the Rent a Room scheme – method 2, you cannot create a loss.
If you use method 1, and pay tax on your actual profits, it is possible that some years will be loss making, these losses can be carried forward and relieved against future profits made on property income.
If I run a guest house, Bed & Breakfast or provide services such as catering and cleaning as part of a letting business, can I still claim Rent a Room relief?
Yes – if your letting activity amounts to a trade you can still take part in the scheme. However, it is a good idea to contact your accountant or message us via this page as there are a few different considerations when calculating the most efficient method for you to use.
We hope this article helps your understanding of how the Rent a Room scheme operates. As always, there are exceptions and complex scenarios. If you have any doubts over whether or not you can claim the relief, please contact your accountant or feel free to contact this page, or myself directly (thomaslowry21@outlook.com)
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