When it comes to renting a room in your property you have two options on how to deal with this income:
- You can treat the income as taxable rental income and from this you can deduct an apportionment of allowable property costs to determine your taxable rental profit
- You can use rent a room relief
Rent a room relief is available to individuals renting out a room (or part of their home) in their own private residence.
There are a number of conditions attached to the relief with it being key that the accommodation is furnished and is part of the individuals main or only home for the tax year the relief relates to.
The relief cannot be claimed when the property is let to a business (so you can’t rent your room to your limited company and claim the allowance).
As long as the rental income is below the rent a room scheme threshold for the tax year then the income is automatically tax free.
However, no costs are allowed to be offset against your rental income if you use this scheme.
Also bear in mind that your rental income will include any money you receive from your lodger for meals and services such as cleaning.
In 2015/16 the rent a room relief limit was £4,250 per household but for the 2016/17 tax year (since 6th April 2016) the allowance has increased to £7,500 per household.
If you share the rental income with someone else such as a partner or spouse then the allowance is shared between you, so for the 2016/17 tax year it would be £3,750 each if applied on an 50/50 basis.
As long as your rental income is below the threshold then the scheme applies automatically and you won’t need to report anything on your tax return.
However, if you earn more than the rent a room allowance you have two options on your tax return:
- (A) You can opt in to the rent a room relief allowance and pay tax on any rental income above it
- (B) You can record your rental income and allowable costs on the property section of your tax return in the traditional manner
Where your rental income is above the rent a room allowance, HMRC will automatically assume option (B) unless you choose to use rent a room relief by ticking this option on your tax return.
You can change which method you use from tax year to tax year, which can be handy if your circumstances change.
Sometimes it can be beneficial to not use the rent a room scheme and instead report the rental income and costs on the property pages of your tax return.
For example, if you have a portfolio of rental properties and with apportioned costs the rental of a room in your home generates a loss, you could instead offset that loss against other property income, which would be more tax efficient than using rent a room relief.