Individuals can earn up to £7,500 rental income per annum tax free under Rent a Room relief by letting out furnished accommodation in their own home.
The £7,500 is rental income, before any expenses are deducted. If the income is below £7,500 for the year, and an individual is not completing a Self-Assessment tax return, they do not need to notify HMRC. However, if the income is over £7,500, they will have to complete a tax return; or if they are completing a tax return already, they have to include this section, although there is no affect on the tax liability.
How does it work?
If you own your house and rent out a furnished room or rooms while you live in the house, you can receive £7,500 in rent per annum without paying any tax. If you receive more than £7,500 in rent, you may need to pay tax. There are two methods to calculate the tax.
Method 1 – Using Rent a Room relief and pay tax on the rental income above £7,500.
Method 2 – Pay tax on rental profit, which is rental income minus expenses, but can not claim Rent a Room relief at the same time.
What about expenses?
You can choose to claim the relief on rental income or claim the expenses against rental income without the relief, you can not claim the relief on rental profit, which is income minus expenses.
You can change the method from year to year.
Example
Paul rents out a room in his house where he lives and charges £900 per month, plus contribution to bills of £50 per month. He also had rental expenses of £8,000 for the year.
Using method 1 and claiming the £7,500 relief, he would pay tax on (£900+£50) x 12=£11,400-£7,500=£3,900. Assuming he is a basic rate tax-payer, the tax due is £780.
Using method 2 without claiming the £7,500 relief, but claiming the expenses, he would pay tax on rental profit of (£900+£50) x 12 – £8,000 = £3,400. Assuming he is a basic rate tax-payer, the tax due is £680.
Paul will use method 2 and pay £680 tax.
What is the impact on Capital Gains Tax?
CGT relief applies to the owner’s main residence. If the owner has rented part of the property to a single tenant at any one time, or to live-in staff, CGT relief applies, no CGT will be due. If the owner has rented part of the property to more than one tenant at any one time, CGT might be due, and it is calculated in proportion to the duration and space of the rental.
Any relief for Airbnb?
The relief covers short term rentals. Homeowners using Airbnb or running a bed and breakfast can claim this relief.
Another relief available is property allowance at £1,000 per annum. This will put the rental expenses to at least £1,000 if the actual expenses are below £1,000. This can not be claimed at the same time as Rent a Room relief.
Other factors
If a couple own the property, each can claim £3,750 relief, making the total relief of £7,500.
The owners need to live in the property, in order to be able to claim this relief.
One does not have to own the property to claim the Rent a Room relief, one can sublet the property and claim the relief – with permission to sublet.