Can you make a profit from your spare bedroom?

Is it time to make room?

A friend of yours has mentioned that there’s a Government scheme which allows you to receive rent tax free. Is this something you can take advantage of to help pay the household bills?

Well he’s probably referring to the 'rent a room scheme'.

So what exactly is the rent-a-room scheme?

Well, the basic concept is that a householder can receive rent of up to £7,500 every year tax-free by letting a room in their home. The rent they receive may or may not include additional services such as food, cleaning and laundry.

The relief is available to individuals but NOT companies or partnerships (by partnerships we mean business partnerships – not husband and wife or civil partners!).

It applies to your main residence (but not a holiday home) whether it’s owned or rented accommodation (subject to certain conditions in the latter).

The rent-a-room scheme can also apply to a guest house or a bed and breakfast businesses – but in this article we’re only looking at rent-a-room as it applies to your home.

One important point - you cannot apply the scheme to a room in your home which you let to a business as office accommodation. So forget about letting the study to your limited company and claiming a tax break under rent-a-room.

We’ve seen a number of small business owners fall into this trap. Using your home as office is a completely different topic and subject to very different rules – feel free to contact us if you’d like to know more about this.

So how does the relief work?

Well, you can rent out a room in your house for up to £7,500 a year and not have to show it on your tax return.

In the case of a married couple, legal partners or other joint property owners, the relief can be divided between the two of you in the most tax efficient way – so you don’t have to just divide it down the middle!

The rent received may also include amounts for food, cleaning and laundry.

If the rent exceeds £7,500 a year you basically have two choices:-

1) Choose for the excess of rents over £7,500 a year to be taxed
2) Choose to be taxed as though you are running a property rental business

Let’s show you what we mean in a couple of examples:

Example 1

Fred rents a room in his home and the annual rent received is £9,500. The relevant expenses are £3,250.

Fred can either:

  • be taxed on the rent in excess of the rent a room relief – in this case £9,500 less £7,500 = £2,000
  • be taxed as a property rental business where only the ‘profit’ is taxed – in this case £9,500 less expenses of £3250 = £6,250

So Fred will choose option 1 and choose for the rents over £7,500 to be taxed.

Example 2

Bob is a more generous landlord and charges an annual rent of £7,000. However his expenses amount to £5,000.

Bob can either:

  • Claim rent a room relief (as the rent he gets is less than £7,500)
  • Choose to be taxed as a property rental business. He will send rental income accounts to the taxman which will show a loss for the year. This loss can be carried forward and offset against future rental income.

Example 3

Gary has his household budget spot on. The income from letting one room amounts to £8,000 and the relevant expenses amount to £8,000.

If he claims rent a room relief he is taxed on £500 (£8,000 less £7,500).

So it makes more sense for Gary to send rental income accounts to the taxman which result in a nil profit/loss.

How do I make the claim?

You let the taxman know you’re making a claim for rent-a-room relief by ticking a box on your Self Assessment tax return.

If you think that you will be better off choosing to be taxed as property rental business, you’ll need to put details of your rental income and expenses on your tax return.

The taxman gives you a little bit of breathing space to change your mind but beware - there are time limits to doing this.

So if you seeking to increase your income during these difficult times opting to rent a room in your house might be a good idea if you’re prepared to accept a loss of privacy.

If you’d like advice on this or any property tax related matters please feel free to contact me at [email protected].

And remember, these tips are not a replacement for professional advice tailored to your precise needs and circumstances.

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