Landlords with lodgers, owners of guesthouses and bed and breakfasts can all benefit from rent-a-room relief. The rent-a-room scheme exempts from tax rental income up to a fixed threshold. However, if the relief is used actual expenses cannot be deducted in calculating taxable profits. The limit is currently £4,250, and it is halved to £2,125 where the property is let by more than one live-in-landlord. From 6 April 2016, the celling will increase to £7,500 (or £3,750.)
How the relief works
If rents are below the limit, a landlord is automatically exempt from tax on rent-a-room income, and is not required to account for the income on a Tax Return.
Where profits are above the cap, live-in-landlords have a choice of methods for calculating taxable profits.
The first method requires an apportionment of actual expenses incurred. Expenses would typically include mortgage interest, council tax, rates, light and heat. The proportion of these costs which are deducted from taxable profits would be based on the amount of the property used by the tenant, for instance, by reference to floor area.
Using the alternative method, taxable rental income is the amount by which gross rents exceed the Rent-a-Room limit.
Each tax year, an indication is made on the Tax Return about which method has been used.
Rent-a-room relief cannot create a loss. Where income is less than the limit, the surplus cannot be used in any other tax year.
Where expenses exceed income, a potential tax benefit is achieved by using the actual basis, and reporting the loss on a Tax Return. Losses can be carried forward to future years and set against profits. Losses are set against the excess for income over the limit if the Rent-a-Room basis is used.
The potential for loss relief is greater for business owners providing guest house and bed and breakfast accommodation. A trading loss can be deducted from total taxable income of the same tax year and/or the preceding tax year.
Rent a room relief only applies to furnished accommodation that is not self-contained. A home separated into flats would not be eligible, however the lodger’s exclusive space could extend to more than...
a single room. The property must be the landlord’s current, main home. A person who leaves their home before the lodger arrives, or starts living in their home after the lodger has left cannot use rent-a-room relief.
It is not a requirement for the landlord to own the property which they let.
Tax outlook regarding rent-a-room
Each tax year it is the choice of the taxpayer about which basis to use. Where actual expenses are less than the threshold, a landlord will be better off using the rent-a-room-scheme. If the relief is typically claimed, but there are unusually high costs for a tax year, for instance as a result of repair works, then the actual basis warrants consideration.
If the use of neither bases creates a profit, or the profit is less than the personal allowance, it is more straightforward to use the rent-a-room scheme. The rent-a-room scheme reduces what needs to be accounted to HMRC, and the related record-keeping.
In view of the forthcoming restrictions on deducting expenses from rental profits, the allowance has the potential to be more effective. In particular, the withdrawal on the deduction of mortgage interest from rental profits and the abolition of the wear and tear allowance, will generally increase tax payable on rents calculated on an actual profits.
Letting part of a property to a lodger will not affect an owner’s entitlement to exemption from capital gains tax on disposal of their main home.
Article Courtesy of: Coman & Co.©LandlordZONE® – legal content applies primarily to England and is not a definitive statement of the law; always seek professional advice. Legislation changes, so check dates on these articles. If you have questions go to the LandlordZONE® Forums