Are you considering renting furnished accommodation in your home? If so, you can claim an exemption from tax under the Rent-a-Room scheme if the gross amount of income from your tenant is less than £4,250 per year.
To qualify you must be resident at the property in question and the relevant accommodation must only be let to a genuine lodger and not used by the tenant for business purposes. The scheme applies to landlords owning or renting their property, but if another individual is entitled to a share of the rents received, for instance where the property is in joint ownership, then the allowance is reduced by 50%.
What if your receipts are greater than £4,250?
In this case you have 2 options:
- You can choose to pay tax on the gross income, less the £4,250 allowance, OR
- You can choose not to take advantage of the scheme and pay tax on your gross income LESS any allowable expenses and capital allowances.
The second option may be beneficial where you are making a loss.
What if you move?
The Rent a Room allowance is per landlord and not per property, so if you had a tenant in your old property and have one in your new property, the income from both tenancies must be added together.
What if you are trading as a guest house or B&B?
You can still opt to take advantage of the Rent-a-Room scheme providing you advise HMRC, but remember – you must pay tax on the balance of your gross income over the £4,250 allowance, so it may not be beneficial.
Can you change how you are taxed?
You can change the method by which you want to be taxed year-by-year, depending on which is most beneficial to you, particularly if you wish to utilise a loss. You must, however, inform HMRC by 31 January following the end of the relevant tax year that you wish to change. This time frame is strictly adhered to and only in exceptional circumstances will the Inspector consider allowing the change if you do not advise him within the time limit stated.
Aside from taxation issues there are other points to consider if you are going to rent a room in your home:
- If you rent your property, you should check your lease agreement to see that your landlord permits lodgers.
- If you have a mortgage on the property, you should confirm that your mortgage provider has no objections.
- Remember to advise your insurance company, as a change of circumstances may mean your usual cover is not adequate.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.
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