Rent a room
The Rent A Room scheme was introduced in the early 1990s as a way of bolstering the small rentals market. Nowadays it might be an extremely useful option for anyone feeling the pinch on mortgage or rental payments in their own home.
In the normal rental market, rental income to the property owner is taxed as so-called “Schedule A” income – broadly speaking, gross income of the rental business minus expenses of the rental business equals taxable income. Generally, of course, the owner does not live in the property themselves. The Rent a Room scheme allows a property owner to rent out a room within their own residence to a lodger, and receive a set amount of the rental income without paying any tax on it. It can even be used by a tenant in a property to sub-let rooms (always provided the terms of the lease allows it).
The conditions to be met for Rent a Room are as follows:
l The room (or rooms) must be furnished.
l The property must be the only or main home of the person letting the room, whether they are an owner or a tenant.
l The cap on income which can be received tax free is £4,250 per annum. This is a gross amount, i.e. it includes any amounts received for services, such as meals, cleaning or laundry.
l If the gross receipts exceed £4,250, the owner/tenant can choose between paying tax on:
The actual profit (gross receipts minus actual expenses and capital allowances, as would normally be calculated under Schedule A)
Just the excess amount of gross receipts over £4,250, without any deductions under Schedule A.
l Methods A and B can be varied in each tax year, so there is no longer term commitment in choosing a particular calculation method. You can just choose the one that puts you in the best position in the current tax year. You can also opt out of the Rent A Room scheme in a particular tax year altogether. You may want to do this if you have actually made a loss, for example.
l Rent A Room cannot be used in relation to letting office space within a home, except incidentally as part of the rental (i.e. the Rent A Room lodger might be a student who studies at home).
l The cap is reduced to £2,125 per year if someone else is also receiving money for letting a part of the same property in the same year.
l There is a box to tick on the Self-Employment pages of the tax return to indicate that you wish to take advantage of the Rent A Room scheme.