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Airbnb, bed-and-breakfast and guest accommodation could qualify

The Summer Budget 2015 introduced, with effect from 6 April 2016, an increase in the level of rent-a-room relief from £4,250 to £7,500 per year. This provides for tax-free income that can be received from renting out a room or rooms in an individual’s only or main residential property.

How does the scheme work?

The rent-a-room scheme is a relief that provides that the rent received by an individual from a lodger (up to a prescribed limit) can be exempt from income tax.

This limit is halved if another person is also entitled to the income. For example, where a husband and wife own the property jointly, the limit is reduced to £3,750 (£2,125 prior to 2016/17) each.

What are the options?

If gross receipts from letting are more than the rent-a-room limit of £7,500 (or £3,750), the individual has the following two options:

First option
Pay tax on the actual profit (rental income less expenses).

Second option
Pay tax on gross receipts over the rent-a-room limit: that is, your gross receipts minus £7,500 (or £3,750). If this method is used, you are not allowed to deduct any expenses.

HMRC will automatically use the first option but if you want to pay tax using the second option, you need to tell HMRC by 31 January following the end of the tax year.

If you pay tax using the second option, this automatically stops if your rental income drops below the £7,500 (or £3,750) limit.

Gross receipts include rental income (before expenses) and any amounts received for meals, goods and services (such as cleaning or laundry).

Qualifying conditions

Rent-a-room is aimed at individuals who let furnished residential accommodation in their own homes. For example, it applies where an individual rents out rooms in a guest house, bed-and-breakfast or similar, provided that it is their main residence. The scheme cannot be applied to rooms let as an office or otherwise for business purposes.

1.          Separate residence

The question that is likely to arise is whether some part of a house – for example, a basement flat – is part of the taxpayer’s residence or is a separate residence.

Where an individual lets furnished accommodation in a self-contained flat in the individual’s only or main residence, they are eligible for rent-a-room relief provided that the division of the residence into a self-contained unit is only temporary.

Whether such a division is temporary is a question of fact. Factors that will need to be considered are:

  • Would structural alterations be necessary to undo the division?
  • How long has the residence been divided?
  • How long is the division intended to continue?
  • Could possession of the flat be obtained separate from the property as a whole?
  • Is the flat separately supplied and metered for mains services?
  • Does the flat have its own unique postal address?
  • Does it have its own separate entry?
  • Would a mortgage lender be prepared to lend on the security of the separate flat?

The decision will be made on a case-by-case basis. Photographs and personal inspection of the premises might be necessary.

2.          Taxpayer moves home during the year

The rent-a-room rules apply to the total gross furnished letting receipts for the tax year from the taxpayer’s own home.

If the taxpayer moves home, and lettings in both their old and new home qualify for rent-a-room relief during the same year, the taxpayer must add together the rents from both to find the total receipts.

If a taxpayer lets their home in the UK while they live abroad, they will not normally be within rent-a-room. This is because the let property will not usually be a residence of the taxpayer at any time during the basis period for the letting.

3.          Taxpayer moves leaving lodger

If the taxpayer with a lodger moves to a new home leaving the old home unsold and the lodger in occupation, rent from the letting may continue to qualify for rent-a-room relief until the end of the basis period during which the qualifying individual moved.

Losses

If you use the rent-a-room scheme because your gross receipts are exempt from tax (under £7,500, or £3,750) or you pay tax using second option, you cannot create a loss.

If you want to create a loss, you must tell HMRC that you want to pay tax on your income less expenses (first option).

Rent-a-room relief and principal private residence (PPR) relief

When the owner comes to sell their property, the amount of PPR relief will not be affected by taking a lodger.

Article from ACCA In Practice