Written by Ray Coman
Rent-a-room relief is available for landlords who live in the same home as their tenants. The scheme is also available to individuals providing bed and breakfast or guest house services. The rent-a-room limit is currently £4,250. Where there is more than one landlord occupying the property (such as a married couple) the limit is halved to £2,125. From 6 April 2016, the limit is set to increase to £7,500, or £3,750 if there is more than one landlord.
Landlords, or guest house owners, receiving gross rents less than the limit, are automatically exempt from tax on this rental income. There is no need to account for the profits on a Tax Return.
If profits exceed the rent-a-room limit a landlord has a choice about how to calculate profits.
The first method is to calculate profits by deducting from rental income a proportion of the costs of providing the accommodation. The apportionment is based on the floor area used by the lodger. Costs are likely to include mortgage interest, council tax, buildings insurance, water rates, light and heat.
Alternatively, profits are calculated by deducing rent-a-room exempt amount from gross rents.
Each year, a taxpayer can decide which method to use for calculating taxable rental profits. A landlord will pay less tax using the actual basis if expenses exceed the limit. Otherwise, the rent-a-room relief will save tax.
Loss making properties
The rent-a-room basis of calculation cannot create a loss. Therefore if income is less than the limit, the ‘unused’ allowance is wasted.
However, if the actual basis creates a loss, it would typically be in the interest of a landlord to report the loss on a Tax Return. This is because the loss will be carried forward to a future tax year and set against profits. The excess of income over the rent-a room limit can be reduced by brought forward losses.
In order to be join the scheme the accommodation must be furnished, part of the landlord’s main home, and not self-contained. The scheme would not apply to income from any property which is not the landlord’s main home. This would apply to a person who has left before the lodger arrived or returned to live at home after the lodger had left.
A trader who is providing bed and breakfast or gust house accommodation can use the scheme.
A comparison of the two methods for calculating taxable income for live-in landlord should be carried out each year. For landlords that typically use the relief, a change of basis may be warranted by an unusual spike in costs, for instance due to a considerable repair works or an additional service charge.
Investors concerned about the impact of forthcoming restrictions on the deduction of property related expenses should re-consider the rent-a-room relief. Not only will the limit be doubling from 2016-17, but wear and tear allowance will no longer be available from the same tax year and tax relief on interest payments will gradually taper. The actual costs of providing accommodation do not affect the tax liability of landlords claiming the relief. For a top rate taxpayer, the relief is equal to a tax saving of £3,375.
The relief also saves time in having to calculate actual expenses. It is not necessary to account to HMRC for actual expenses incurred and record keeping is therefore alleviated.
As explained in CG64700, receiving rental income for a lodger will not harm an owners’ entitlement to exemption from capital gains tax on disposal of their home.
The relief is set out in section. 797 ITTOIA 2005.