If you plan to rent a room in your home, it’s essential to grasp the tax system’s implications. Owners, occupiers, or tenants who rent furnished accommodation to lodgers in their primary residence may qualify for tax relief.
In the UK, the Rent a Room Scheme allows you to earn up to £7,500 annually from letting furnished accommodation without paying tax on profits. If you share income, the threshold halves to £3,750, regardless of the rental duration.
If you don’t typically file a Self Assessment tax return and your Rent a Room income remains below £7,500, you need no paperwork but should keep an income record. Limited company directors or sole traders must declare the entire rental income on their tax return.
How the Rent a Room Scheme functions:
If your annual rental income is under £7,500, no additional tax is required.
However, for income exceeding £7,500, you must file a tax return. You have two options: you can opt for the Rent a Room scheme or declare income and expenses on your Self Assessment return.
Opting in means taxing the total income minus £7,500 (or £3,750 if shared). On the other hand, opting out taxes actual profit (income minus allowable expenses).
It’s important to consider your expenses; if they exceed £7,500, not opting in might be a better choice. Additionally, remember that you can change your choice annually by notifying HMRC by January 31st after the tax year ends.
Do you need permission to rent out a room?
Before renting out a room on your property, it’s crucial to ensure you have the necessary permissions. Ownership of the property is not a requirement for using the scheme; if you are renting (and your lease allows it), you can rent out a room and claim the tax exemption.
However, if you own the property and have a mortgage, it’s advisable to check with your mortgage lender to avoid any potential breaches of conditions.
Whether you are an owner or a renter, you should also confirm with your home insurance company that your policy permits room rental.
Once you have confirmed your eligibility to rent out a room on your property, you can proceed to consider the Rent a Room Scheme.
Who can and cannot use the Rent a Room Scheme?
You can use the Rent a Room Scheme if:
- You let a furnished room to a lodger.
- Your letting activity constitutes a trade, for example, if you run a guest house, a bed and breakfast business, or provide services like meals and cleaning.
You cannot use the Rent a Room Scheme if the accommodation:
- Is not part of your main home when you let it.
- Is not furnished.
- Is used as an office or for any business, although you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities.
- Is in your UK home and is let while you live abroad.
Can I claim the Rent a Room allowance on short-term or Airbnb rentals?
Currently, the Rent a Room scheme encompasses short-term rentals, allowing you to claim it if you operate a bed and breakfast or utilize services like Airbnb.
Alternatively, if you rent rooms on a short-term basis through Airbnb or similar platforms, you can consider utilizing the £1,000 property allowance. However, you cannot use both the property allowance and the Rent a Room allowance simultaneously.
For most homeowners who rent out a short-term room (up to 90 days a year), the Rent a Room Scheme is likely to offer greater advantages. The property allowance could be a useful alternative for individuals renting out other assets like parking spaces or driveways.
Get your bookkeeping in order:
Maintaining proper bookkeeping, including records of your income and expenses, is essential. Even though you cannot claim expenses with the Rent a Room scheme, these records may be necessary if you choose to opt out in the future.
Our experts can assist you in tracking your income and expenses, allowing you to focus on more meaningful tasks.
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