Spare room to Let? That’s Great News!

Written by Shakeel Butt on 27 October 2017

 

In the March 2017 Budget the Government announced it intends to review the ‘rent-a-room scheme’ which is currently a tax-efficient way of letting out your spare room.

If you receive income by letting a room (which must be furnished) in your own home to a lodger then you can claim ‘rent– a-room’ relief.

Under this relief, you can earn a gross rent of up to £7,500 per year tax free for the tax years 2016/17 and onwards.  The letting must be for residential purposes and will not apply where part of the home is let as an office or other business premises. The scheme can not be used if the accommodation is in a UK home that is let whilst the landlord lives abroad.

The lodger will usually have a furnished bedroom and share the other facilities in the home.  You can take advantage of this scheme regardless of whether you own your home or rent it. However if you are renting, you should check if your tenancy agreement permits you to take a lodger.

If the total rent received (including any additional charges for services such as meals, laundry, cleaning etc.) is less than £7,500 there is no tax to pay which is good news. However it would be best to do the calculations described below to ensure if you make a rental loss using the normal rental rules; you carry forward the loss to off set against future income and do not opt for the rent-a-room scheme.

Gross rent more than £7,500 – In this situation there are 2 options available.

  • Option 1. The landlord opts not to use the scheme and treat the renting of the room as a normal rental business, working out the profit and loss using the normal expenditure rules claiming the various expenses.
  • Option 2. The first £7,500 is counted as tax free allowance and tax is paid on the remaining income with no rental expenses (e.g., insurance, repairs, heating etc.) to be deducted.

The rent-a-room scheme is optional and in most cases option 2 will be more favourable and before deciding to join the scheme, calculations should be compared using option 1 and 2.  Option 1 automatically applies unless tax payer informs the tax office within the time limit that they want to use option 2 and the rent-a- room scheme.

If you own the property jointly the £7,500 is halved to £3,750 each.

For further advice or information, please contact one of our Property Specialists, Shakeel Butt.

 

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Shakeel Butt
Private and Corporate Client Director