Introduction
The Rent a Room Scheme is a generous tax allowance for renting out a spare room in your home. Most live-in landlords have no tax to pay on rental income up to £7,500 per tax year. The scheme is optional and may not make sense for everyone. In most cases it is simple, and there is nothing for the landlord to tell the taxman.
Rent a Room Scheme Conditions
To use the scheme, you have to meet some simple conditions:
- The accommodation must be furnished.
- It must form part of your main UK home, and you must be living in the property at the same time as the tenant / lodger for at least some of the letting period.
- You must not be living abroad at the time of the rental.
- The room must not be used as an office or for business (but evening and weekend study / home-working is allowed ).
Charges for additional services such as meals or laundry also count as part of the rental income.
Two people sharing the rental income (eg. joint owners) would have a personal rent-a-room allowance of £3,750, each rather than the £7,500.
Is the Rent a Room Scheme Right for Me?
The Rent a Room scheme is optional. One key point is that you may not claim any rental expenses. You will pay tax on the amount of your rental income that exceeds £7,500 per year.
If you opt out, you will pay tax on the rental profit (rental income minus allowable expenses). It may be worth doing this if you wish to carry forward a loss against future years’ taxable rental income. Also, you might opt out if your expenses exceed the £7,500 Rent A Room Scheme limit.
You can change the method you use each year, but you must let HMRC know by 31 January following the end of the tax year. You must keep to a single method within each tax year.
What Do I Tell the Tax Man?
If your rental income is less than £7,500 and if you are opting into the scheme, exemption is automatic. If you normally complete a tax return, tick the box on the tax form. Otherwise there is nothing to tell the tax man.
If you have made a loss on the rental and you would like to carry that loss forward against future years’ taxable profits, you will need to complete a tax form.
If your rental income exceeds the £7,500 limit, you must complete a tax return. You will need to choose whether to opt-in (pay tax on the gross rental income minus £7,500) or opt out (pay tax on the gross rental income minus allowable expenses).
Keep a record of your income for at least 6 years. Even if you intend to use the Rent a Room Scheme, keep a record of expenses too in case you decide to opt out later.
Check the HMRC website for their guidance notes.
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