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David King, tax consultant

Taxing Times

This article appeared in the Yorkshire Post on Saturday, 27 April 2010

Advice on How to Rent Out a Room While Shutting Out the Taxman

By David King Tax Consultant

There are tax breaks for those deriving a rental income from letting a room in their own home.

“Rent-a-room” relief was first introduced in 1992 and it applies to income received by an individual from providing furnished accommodation in their own home.

The rules either exempt the income from being taxed or allow it to be taxed on a more favourable basis than other rental income sources.

The relief can only apply where the let is in the only or main residence, so where a taxpayer owns a second home or a holiday home, the relief does not extend to any rents from these.

Interestingly, the main residence for rent-a-room relief purposes is not automatically the same as the property that might have been nominated as the main one for capital gains tax purposes.

It should be noted that the relief only applies to residential accommodation so does not extend to, say, a room let as an office in someone’s home. However, in some circumstances it can apply to a guest house.

Whether rent-a-room relief can apply is less clear cut where the accommodation being let is self-contained.

In this case, the Revenue’s view is that the accommodation would qualify for the relief if the division into a self-contained unit is only “temporary”. In establishing whether the division is temporary, the Revenue would consider such factors as whether structural alterations would be required to undo the division, how long the division has been in place, and whether the flat is separately supplied and metered for mains services.

The exemption applies if the gross rent (before deducting any expenses) is no more than £4,250 in the year.

If any additional charges are made, such as for meals or laundry, then these should be included in establishing whether you have gone beyond the £4,250. Where the income is below £4,250, the exemption would automatically apply, but you can ask to be taxed under normal rules (rents less expenses), which may be beneficial, for example, where a loss arises. An election for rent-a-room relief to not apply is made on a year-by-year basis, and is done by notifying the Revenue in writing, or by making an appropriate entry in the tax return.

Where the rents are above £4,250, you can elect to use a simplified basis of calculating the taxable rents. The effect of this is that the rents to be taxed are only those in excess of the £4,250 limit. Therefore, for example, if the rents were £5,000 for the year, the taxable amount under this basis would be £750. One would wish to opt for this basis to be used if the net taxable rent under normal rules (income less expenses) would exceed £750. Again, the election to use this basis is to be made in writing or in the tax return, and once in place will continue to apply for future years. It is imperative to keep an election under annual review.

The time limit for either opting out of rent-a-room relief or electing for the simplified basis is one year from January 31 following the tax year. For example, the deadline for the tax year ended April 5, 2009 is January 31.

There are few circumstances in which the Revenue would allow a late claim.

The £4,250 limit is halved where you have a jointly-owned home, so the most common situation would be where a married couple jointly own their home, and in that case they would each have a limit of £2,125.

From a non-tax perspective it is essential that the taking in of a lodger is cleared with your lender, if there is a mortgage on the property, and also with your insurer.
Rent-a-room relief is potentially a valuable tax break and if you are affected by any issues in this article you are strongly advised to seek professional advice.