Lodgers & Tax:

The rent a room allowance is to be reviewed by the government, a move which was hidden in Wednesday’s Budget small print. The government is to review the way in which the rent-a-room tax relief scheme operates in what is thought to be in a bid to tackle a spate of short-term lettings using websites such as Airbnb and Gumtree.

Currently, anyone letting a room in their own home to lodgers (you are allowed up to two lodgers) can receive £7,500 tax free under the scheme. However what’s been happening is that those people offering short-term lets through sites such as Airbnb can also take advantage of this tax relief scheme.

Research by the Residential Landlords’ Association (RLA) indicates that there are more than 23,000 rooms listed on Airbnb in London alone.

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Rent-a-room was introduced to encourage lodging, to increase the supply of affordable long-term accommodation in locations where it is needed, for workers and students for example, but the short-term holiday type lettings run contra to that aim.

A consultation will take place into the way rent-a-room is operating now to ensure it is better targeted to support longer term lettings, reflecting its original purpose, and redesigning the relief in the Budget Red Book if necessary. No timescale has been set, but measures could be announced in the Autumn Budget, to take effect as soon as next year.

Who qualifies for the Rent a Room scheme?

This is an optional scheme that’s open to owner occupiers or tenants who let out furnished accommodation to a lodger (or up to two lodgers) in their main residence. It allows earnings up to £7,500 a year tax-free, or £3,750 each if a couple is letting.

A lodger is a licensee, not a tenant, and therefore does not have Housing Act rights. However, the lodger must share facilities with the landlord and not have exclusive possession of a separate facility, otherwise secure tenure may result, and a court order would be required to evict.

Tenants can also take advantage of the scheme by subletting to a lodger, but most letting agreements will state, only with their landlords’ permission, not to be unreasonably withheld.

If earnings are less than the rent-a-room allowance, then the tax exemption is automatic and there is no need to do anything.

However, if the earnings are above the allowance, an annual self-assessment tax return must be completed and submitted to HMRC by the 31st of January following the tax year in which the money is earned. In this case it will be necessary to either (1) opt into the scheme, in which case HMRC must be informed beforehand, or (2) not opt in, in which case the income and any associated expenses must be recorded on the property pages of the tax return

If landlords provide lodgers with meals and other services any money received for this must be added to the rent received to work out the total income.

If the total income is more than £7,500 for any tax year (6 April to 5 April), and the overall income (with allowable expenses deducted) is greater than an individual’s Personal Allowance, tax will have to be paid on the excess.

Houses with lodgers are subject to similar safety requirements as are normal lettings, so gas safety checks and smoke alarms are required.

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