The rent-a-room scheme allows those with a spare room in their home to let it out furnished and to receive rental income of £7,500 tax-free each year without the need to declare it to HMRC. Where more than one person receives the income, each can receive £3,750 tax-free. The limits are not reduced if the accommodation is let for less than 12 months.
The rent-a-room scheme can be used by anyone who lets a furnished room in their own to a lodger. They do no need to own their own home – it can also apply if they rent (but they should check with their landlord whether their lease allows this). The rent-a-room scheme can also be used by those running a guest-house or a bed-and-breakfast establishment and provide services, such as meals and cleaning, as well as accommodation.
The scheme is not available in relation to accommodation which is not in the individual’s main home or which is let unfurnished.
Where the rental receipts are £7,500 or less (or £3,750 or less where more than one person benefits from the rental income), the exemption is automatic. There is no need to tell HMRC about the rental income. Rental receipts are the rental income before deducting expenses, plus any charges made for services such as cleaning or meals.
Using the scheme where rental income exceeds the threshold
The rent-a-room scheme can also be used where the rental receipts exceeds the rent-a-room threshold (£7,500 or £3,750 as appropriate). Where this is a case, the taxable amount is simply the amount by which the rental receipts exceed the rent-a-room threshold. This approach will be beneficial if the rent-a-room threshold is more than actual expenses. However, where using actual figures will produce a loss, it is not beneficial to claim rent-a-room relief as this cannot create a loss and the benefit of the loss will be lost.
Where rental receipts are more than the rent-a-room threshold, a tax return must be completed. If the relief is to be claimed, this can be done by ticking the relevant box in the return.
The election can be made each year, depending on whether it is beneficial to do so.
Mary lets out her spare room to a lodger for £100 a week, earning her £5,200 a year.
As the receipts are less than £7,500, she takes advantage of the automatic exemption for rent-a-room relief. She does not have to declare the income to HMRC.
Polly lets out a room in her home for £10,000 a year. She incurs expenses of £1,000 a year.
If she does not claim rent-a-room relief, she will pay tax on her profit of £9,000. However, by claiming rent-a-room relief, she is only taxed to the extent that her rental income exceeds £7,500. She is therefore able to reduce her taxable profit from £9,000 to £2,500 by claiming the relief.
Partner note: ITTOIA 2005, s. 309.