The Rent a Room scheme
The Rent a Room scheme applies to rent from letting out furnished accommodation in your home and income from providing any related services, such as providing meals or doing your lodger’s laundry. In the normal way you would pay tax on any profit you make – in other words, the income you get less allowable expenses you incur. If instead you opt for the Rent a Room scheme, the first slice of the income is tax-free, but you are not allowed to deduct any expenses.
Tax-saving ideas - Rent a Room Relief
If you make a profit from taking in lodgers and your income from the lettings is £4,250 or less in 2009–10, there will be no tax to pay on this income if you opt for the Rent a Room scheme. If your gross income from the lettings is more than £4,250 but the expenses and allowances you can claim come to £4,250 or less, you will pay less tax if you opt for the Rent a Room scheme. Using the Rent a Room scheme can save you administration because, for tax purposes, you need only keep records of your income not any expenses.
The scheme can apply only to rooms you let in your only or main home. It doesn’t matter whether you own the home or you yourself are a tenant (though bear in mind that you may need permission from a mortgage lender or landlord before taking in lodgers). The scheme is not intended to apply to rooms let as offices or for other business purposes. And you cannot claim Rent a Room relief if you yourself are not living in the property because, say, you have gone abroad or moved into job-related accommodation.
Under the scheme, in 2009–10, the first £4,250 of such income (without any expenses deducted) is tax-free. If anyone else living in the same home is letting out another room or you are jointly letting out room(s) with one or more other people, you each get £2,125 tax-free. The amount of Rent a Room relief has been unchanged since April 1997.
Rent a Room scheme Example
Natalie Lean lets out three rooms in her house, bringing in a total of £150 a week in rent. This means her gross rental income for 2009–10 is £7,800, on which she could claim expenses and allowances of £2,350.
If the rental income is taxed as normal property income, she will pay tax on £7,800 – £2,350 = £5,450. But if she claims the Rent a Room relief, she will pay tax on the excess of the gross rental income of £7,800 over £4,250 – that is, on £3,550.
Rent a Room relief means Natalie will pay tax on £1,900 less income.
Unless you made a loss on the letting (in other words, your expenses came to more than the income), it will be worth claiming Rent a Room relief if your gross income from the letting(s) is £4,250 or less. All you need to do is put a cross in box 4 on page UKP1 if this is your only letting income. There is nothing more to enter – leave the rest of the UK property pages blank.
In all other cases, which boxes you complete depends on how much profit or loss you made from the letting(s) in 2009–10:
- if you made a loss, follow the instructions for Property income
- if the expenses and allowances you can deduct from your letting income come to more than £4,250 (or £2,125 if you are sharing the relief), follow the instructions for Property income
- if the deductions you can make from your letting income come to £4,250 (£2,125) or less, opt for the Rent a Room scheme by putting your income in box 18 on page UKP2 and the Rent a Room relief you are claiming (either £4,250 or £2,125) in box 35. Don’t enter any expenses in boxes 22 to 27 and don’t claim any other deductions in boxes 30 (annual investment allowance) or 34 (wear and tear allowance).
It is commonly claimed that taking in lodgers through the Rent a Room scheme will not mean losing any of the private residence relief which prevents a capital gains tax bill when you sell your home. This is not correct. The Revenue’s view is that if you have a single lodger (whether you use the Rent a Room scheme or not), you do not lose private residence relief. But if you have two or more lodgers (again, regardless of whether you have opted for the Rent a Room scheme), you are effectively running a business and so lose some of the capital gains tax relief on your home. However, you may instead claim lettings relief.