Rent-a-room is a tax relief available individuals who let out a room/s in their home whilst occupying the property at the same time, for example to long-term lodgers, students, individuals working away from home during the week, tourists and short-term visitors – such as those visiting London to attend Wimbledon. It was originally introduced in the UK in 1992 by the Government to try and encourage individuals to let out their spare rooms.
The individual is not required to own the property in order to qualify for this concession (the relief is also available for properties that are rented) but the individual must still be living in the property during the period in which it is let. It is, therefore, not possible to claim the relief during a period when the whole of the property is let, for example whilst the individual is away on holiday or there is a particular demand for properties in the area (late June/early July in SW19 is a common hotbed for this).
Going forward it has been announced that Her Majesty's Revenue and Customs (HM Revenue and Customs or HMRC) is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage.... More are going to ensure that the main occupier of the property is also staying there at the same time as the tenant and greater evidence may need to be provided to demonstrate this. The change in approach by HMRC is likely to be a reaction to the significant number that now rent out their home via Air BnB.
Assuming the criteria for rent-a-room relief is met, an individual to receive rental income from the letting of a room in their home tax-free, as long as the gross rental receipts do not exceed £7,500 in any one tax year. If two people are entitled to receive the rental income then this limit is halved, i.e. £3,750 per person, per annum.
Should the rental receipts exceed £7,500 in a tax year, however, there are two options available:
1. The individual can deduct the rent-a-room limit of £7,500 from the gross rental income received and any excess rent is then treated as taxable profit, i.e. there is no relief for any expenses incurred; or
2. The taxable profit can be calculated using the normal property income rules, i.e. any expenses incurred during the period are deducted from the rental income received, resulting in a net taxable profit. Examples of expenses that can be claimed are agency fees, cleaning costs, mortgage interest paid and utility costs (of which an appropriate proportion of the expense would be claimed), accountancy fees and insurance costs.
It is worth noting that if a loss is made, it is generally more beneficial not to claim rent-a-room relief as the loss will not be realised under the scheme.
Those who have been making their homes available during Wimbledon fortnight will need to ensure they are either present in the property during this time in order for this relief to apply or will need to make a correct declaration of this income, and a proportion of the expenses incurred during this time, in a Self Assessment tax return.
We are well versed in this area and would be happy to discuss how to fully utilise this relief in order to optimise your UK tax position. If you would like to discuss your eligibility to rent-a-room relief, please contact me or another member of our team.