Rent a Room scheme - How the tax rules can work for you
£7500 tax free income per year, in addition to your personal allowance? Sounds too good to be true, but that is essentially what the Rent a Room scheme offers - and many people in the UK, from homeowners to AirBNB hosts, benefit from it.
What is the HS223 Rent a Room scheme?
The Rent a Room Scheme (also known as Rent a Room Relief) mainly relates to landlords that let rooms in their home - for example those homeowners who have a lodger, or AirBNB hosts who rent a room within their house.
If you earn less than £7,500 then you do not need to declare the income or notify HMRC. However if you earn over this threshold then you can “opt-in” to the scheme through your Self Assessment Tax Return - but remember if you choose not to opt in, you will have to show the income and expenditure related to the rental on the property pages of your SA100.
How to qualify for Rent a Room scheme
You can opt into the scheme at any time if;
you’re a resident landlord, whether or not you own your home
you run a bed and breakfast or a guest house
However you cannot use the scheme for homes that have been converted into separate flats - they must still be a part of the main property.
You are not eligible to use the scheme if
The rooms let are unfurnished
It’s not your main residence
Let as an office for business - the space must be used to “live in” but those renting the room can work from home during “out of hours” (i.e evenings and weekends) and it can be let to students.
You have let out your home whilst living abroad.
Are there any reasons not to claim Rent a Room relief?
You should be aware that If another person receives rental income from the same property, then the allowance gets reduced to £3,750, and this includes joint ownership. This reduction in the allowance may mean that it could benefit you to claim income and expenses on your tax return
If you have made a loss on letting the room out, then it could benefit you adding it to your property pages the traditional way.
Can I claim Rent a Room relief if my gross rental income is more than £7,500?
If the gross income you receive from your lodger is more that the rent a room scheme limit, then there are a couple of options to choose from - you can either choose to not opt in for the scheme and include your income and expenses on your tax return, paying tax on the profit.
Alternatively you can claim your gross income up to £7,500 through the rent a room scheme, and pay tax on any gross income over this amount. If you choose to do this you can decide to opt out of the scheme at a later date if you believe paying tax on the profit of the rental income would benefit you more.
Remember you can change the way in which you pay tax on rent a room income year on year - you just need to notify HMRC within one year of the 31 January following the end of the tax year.
