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Rent a room in your home

The Government intends to review the rent-a-room scheme, it currently remains a tax-efficient way of letting out a spare room. HMRC’s rent-a-room scheme is an optional exemption scheme. It allows individuals to receive up to £7,500 of tax-free gross income from renting out spare rooms in their home. The exemption is halved where the income is shared with a partner or someone else. As long as income is below the annual threshold it does not need to be reported to HMRC.

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. The scheme cannot be used if the accommodation is in the UK whilst the landlord lives abroad.

The changes may well affect those with income using Airbnb. 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. 

Accounting for tax

If the annual threshold is exceeded, here are the 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).

To work out whether it is preferable to join the scheme, the following methods of calculation should be compared:

  • A method: paying tax on the profit from letting worked out in the normal way for a rental business (i.e. rents received less expenses).
  • B method: paying tax on the gross amount of receipts (including receipts for any related services they provide) less the £7,500 exemption limit.

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 click here.