This article appeared in the Yorkshire Post on Wednesday 24th May 2005.

G&E Taxing Times - Rent a Room Scheme

Duncan Meredith Senior Tax Consultant

This week we deal with a relief that is available for those who are looking to share their home by letting a part of it to a lodger.  Duncan Meredith, tax consultant in Garbutt & Elliott's Property Services Group, looks at the rent a room scheme.

Many people nowadays are involved in letting property.  The recent explosion in the "buy to let" market has seen a lot of individuals, with no prior experience of the sector, plunging into the ownership of residential property for letting.  The student area of North Leeds expands continually and the success of the local economy drives the demand for quality accommodation for young professionals.

Less common, but not to be ignored, is the idea of renting out part of your own home, making use of spare bedrooms.  This simple idea could formerly cause a real tax headache, even though the amounts involved might have been small.  Recognising this, and keen to encourage this sort of letting, the Government introduced the "rent a room scheme".

From its commencement in 1992-93 up until 1996-97, up to £3,250 of receipts from the letting of furnished accommodation in your own home was exempt from tax.  Since 1996-97, the limit has been £4,250.  The way the scheme works is that gross receipts only are taken account of, with no deduction for related expenses.  Gross receipts include other payments, such as for meals, cleaning, laundry and any other goods or services connected with the letting.

If the limit is breached, the excess is taxed as rental income.  This may be more beneficial than taxing the actual surplus of receipts over expenses, although it is possible to elect for the tax to be calculated in the normal way.  Clearly, this is preferable if there is an actual loss, although it is difficult to see how this could arise.  The only costs deductible would be those directly connected with the letting activity and could not include "capital" expenses, such as structural alterations.

The relief is halved if, for example, the property is jointly owned at any time in the tax year.  If there are more than two owners this does not reduce the relief further.  However, this restriction applies if anyone receives rent or other payments in connection with the letting, whether or not they own the property.

Anything defined as a residence qualifies, including a caravan or houseboat.  Note that, it must be your only or main residence so that, for example, working abroad or occupying separate job-related accommodation would prevent you qualifying for the relief.

Another restriction is that the rooms must be let as living accommodation, not as an office or for some other business purpose.  This is to prevent the exemption applying to tax-deductible expenditure. Nevertheless, if your lodger genuinely lives with you, some studying or evening/weekend business working in your home will not preclude the relief.

Your home does not have to be owned by you: it could be rented by you but take care that your lease allows you to do this.  Similarly, your mortgage lender and insurance provider should be consulted to confirm that you are not breaching any terms and that your insurance remains adequate.

Moving house in the UK does not affect the relief claimed in respect of one of the properties.  If both are let, the receipts are added.  It is best to seek advice, if your circumstances are not straightforward. 

If you are treated as trading, the scheme does not apply.  So, if you are running a guest house, normal accounts will be required and you will not be able to claim relief - unless in addition you are letting out your private rooms, separate from the trading activities (the relief would only apply to the non-trading receipts).

Changing the basis of calculating the taxable receipts can happen from year to year, provided an election is made in time (by 31 January, 22 months after the tax year-end).  This requires up to date record keeping (so that you know the position in time) of the full amount of receipts and deductible expenses (for the comparison to be made).  In other words, in all but the simplest cases, the scheme does not save you the need for records, it just may save you tax, once you have worked out what will be good for you!

Adopting the scheme does not affect the use of losses on other rental activities, including brought forward from earlier years.  These will be preserved to be set against scheme or other rental profits.  However, you cannot claim interest costs under the scheme.

Finally, if you are letting a whole property that is not your own residence, you may qualify for the beneficial treatment as "furnished holiday lettings".  This was the subject of an earlier article in this series.  

Garbutt & Elliott are Chartered Accountants and tax advisers with offices in Leeds (telephone 0113 273 9600) and York (01904 464100).  Duncan Meredith can be contacted at the York office, or by email to dmeredith@garbutt-elliott.co.uk.