Budget 2017 announced that the Government intends to review the rent-a-room scheme, but it currently remains a tax-efficient way of letting out a spare room. The Rent-a-Room Scheme allows owner occupiers and tenants to receive tax-free rental income if you provide furnished accommodation in your only or main home.
The current annual Rent-a-Room limit is £7,500. This reduces to £3,750 if someone else receives income from letting accommodation in the same property, such as a joint owner. The limit is the same even if you let accommodation for less than 12 months. In order to qualify under the rent-a-room scheme, 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 a UK home which is let whilst the landlord lives abroad.
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.
If additional services are provided (cleaning and laundry etc.), the payments must be added to the rent to work out the total receipts. If income exceeds £4,250 a year in total, a liability to tax will arise, even if the rent portion is less than that. If income exceeds £7,500 a year in total, a liability to tax will arise, even if the rent itself is less than that.
To work out whether it is preferable to join the scheme, the following methods of calculation should be compared:
You pay tax on your actual profit – your total receipts less any expenses and capital allowances.
You pay tax on your gross receipts over the Rent-a-Room limit – that is, your gross receipts minus £7,500 (or £3,750). You can’t deduct any expenses or capital allowances if you choose this method.
HMRC will automatically use your actual profit (Method A) to work out your tax.
If you want to pay tax using Method B, you need to tell HMRC within the time limit. You will continue to pay tax on your gross receipts over the Rent-a-Room limit until you tell HMRC that you want to change back to paying tax on your actual profit (Method A).
Once a taxpayer has elected for method B, it continues to apply in the future until they tell HMRC they want method A. The taxpayer may want to switch methods where the taxable profit is less under method A, or where expenses are more than the rents (so there is a loss).
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