Rent-a-Room Relief - A Useful Exemption
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Originally Published 3rd February 2007
About the relief
The Rent-a-room scheme is an optional exemption scheme that lets people
receive a certain amount of tax-free ‘gross’ income (receipts before expenses)
from renting furnished accommodation in your only or main home. The current
annual exemption is £4,250 a year (£2,125 if letting jointly).
Individuals can choose to take advantage of the scheme if they let furnished
accommodation in their only or family home to a lodger. A lodger is someone who
pays to live in the house, sometimes with meals provided, and who often shares
the family rooms.
A lodger can occupy a single room or an entire floor of the house. However,
the scheme does not apply if the house is converted into separate flats that are
rented out. Nor does the scheme apply to let unfurnished accommodation in the
An individual does not need to be a home-owner to take advantage of the
scheme. Of course, those who are renting will need to check whether their lease
allows them to take in a lodger.
If the lodger is charged for additional services, for example, cleaning and
laundry, the individual will need to add the payments they receive to the rent,
to work out the total receipts. If income exceeds £4,250 a year in total, a
liability to tax will arise, even if the rent is less than that.
Rent-a-room scheme and running a business
The rent-a-room scheme can apply to taxpayers running bed and breakfast
businesses or guest houses, or providing catering and cleaning services as part
of a letting business. In such cases, the taxpayer must complete the relevant
parts of the self-employment pages of their self-assessment tax return.
Example 1 – Rent-a-room
Jo and Sinisha are single persons sharing a house as their main residence.
They have for some years taken in lodgers to supplement their income. As Jo pays
the greater share of the mortgage interest on the house, she and Sinisha have an
agreement to share the rental income in the ratio 2:1, although expenses are
Sinisha and Jo have elected for only the excess over the exemption amount to
Sinisha has losses of £350 brought forward, which arose from this letting
because he elected in one tax year for the exemption not to apply.
For 2005/06, the position is as follows:
Gross rents (y/e 5.4.06)
Allowable expenses 1,250
Sinisha’s share of gross rents is below his one-half share of the exempt
amount (£2,125) so his election to tax only the excess is deemed to be withdrawn
and his share is treated as nil. Jo’s election to tax only the excess over the
exemption continues to apply, so that her property income assessment will be
£1,875 (£4,000 - £2,125).
For 2006/07, the position is as follows:
Gross rents (y/e 5.4.07)
Allowable expenses 2,250
For both Jo and Sinisha their share of gross rents exceeds their share of the
exempt amount (£2,125 each). Since their share of the expenses also exceeds
their share of the exempt amount, the election to tax only the excess will be
unfavourable. It is therefore assumed that Jo withdraws her election (by 31
January 2009). They are both assessed on the basis of the normal property income
computation, with Sinisha’s £350 loss brought forward being set against his
Interpretation of rent-a-room relief and business use
The Revenue confirmed in Tax Bulletin number 12 at page 154 that rent-a-room
relief is not available to exempt from tax income from the letting of part of a
residence as an office or for other business purposes. The relief only covers
the circumstance where payments are made for the use of living accommodation.
However, the relief is not denied where a lodger living in the home is provided
with a desk, or the use of a room with a desk, which he or she uses for work or
Advantages and disadvantages of the scheme
There are advantages and disadvantages of the scheme – it’s simply a matter
of working out what is best for the individual concerned.
The principal point to bear in mind is that those using the rent-a-room
scheme cannot claim any expenses relating to the letting (for example, wear and
tear, insurance, repairs, heating and lighting).
To work out whether it is preferable to join the scheme or declare all of the
letting income and claiming expenses via a self-assessment tax return, the
following methods of calculation need to be compared:
METHOD A: paying tax on the profit they make from letting
worked out in the normal way for a rental business (that is, rents received less
METHOD B: paying tax on the gross amount of their receipts
(including receipts for any related services they provide) less the £4,250 (or
£2,125) exemption limit.
Method A applies automatically unless the taxpayer tells their tax office
within the time limit that they want method B – see below.
Once a taxpayer has elected for method B it continues to apply in the future
until they tell their tax office they want method A. The taxpayer must tell
their tax office within the time limit if they decide they no longer want method
B to apply. They may want to do this where the taxable profit is less under
method A or where expenses are more than the rents (so there is a loss).
A taxpayer may have gross receipts of £5,000 but their expenses are £6,000 so
they have a loss of £1,000. Unless they opt out of method B, they will still be
taxed on the excess of the gross receipts of £5,000 over the exemption limit of
£4,250; that is, the taxable profit from letting in their own home will be £750.
Example 3 – where method B is better
Florence lets out a room in her own home for £100 a week. Nobody else lets a
room in the house. Her gross receipts for the year are £5,200. She isn’t exempt
from tax because her gross receipts exceed the exemption limit of £4,250. She
has expenses of £1,000 so her profit is £4,200. The excess of her receipts over
£4,250 is £950 (£5,200 less £4,250).
Using method A, she pays tax on her actual profit of £4,200.
Using method B, she pays tax on a profit of £950.
In Florence’s case, method B is better and she elects for it. The profit of
£950 is included in Florence’s overall business computation if she has other
rental business income from lettings outside her home. The profit of £950 will
be the only rental business profit if Florence has no other letting income.
Example 4 – where method A is better
John lets out a room in his own home for a rent of £100 a week plus
contributions to the heating and lighting. His total letting receipts for the
year from letting the room are £5,200 rent plus £200 for light and heating =
£5,400. He has expenses of £4,500 so his profit is £900. The excess of his gross
receipts over £4,250 is £1,150 (£5,400 less £4,250).
John pays tax on his actual profit of £900 if he uses method A.
John pays tax on a profit of £1,150 if he uses method B.
In John’s case, method A is better. Therefore he either does not elect for
method B or, if he has already done so, he tells his tax office that he no
longer wants it to apply. The profit of £900 is included in John’s overall
business computation if he has other rental business income from lettings
outside his home. The profit of £900 will be the only rental business profit if
John has no other letting income.
Changing from method A to method B and vice versa
A taxpayer can change from method A to method B (or vice versa) from year to
year. But each time they want to change they must tell their tax office within
the time limit.
Method B will automatically cease if the rent drops below the exemption limit
of £4,250 (or £2,125). The taxpayer will then be automatically exempt from tax
unless they ask within the time limit for their actual profit or loss to be
taken into account. If, in the following year, their gross receipts go up and
they want to use method B again, they must tell their tax office within the time
limit. Otherwise they are automatically taxed on the normal rental business
basis (receipts less expenses) (PIM 4050).
Alternative method of calculation
The simplified method of calculation (‘method B’ above) is contained in the
Finance (No 2) Act 1992, Schedule 10, paragraph 11, and elections for it are
covered in paragraph 12. The taxpayer can elect for the paragraph 11 method of
calculating profits if the total of the ‘relevant sums’ exceeds the individual’s
limit for the year. Any balancing charge is not counted in the total for this
Under the paragraph 11 method of computation, tax is simply charged on gross
receipts less the exemption limit, and no other expenses can be claimed, no
capital allowances can be given, but any balancing charge is still taxable.
In practice balancing charges in a continuing case are likely to be rare.
This measure is to prevent exploitation of rent-a-room. It deals, for example,
with the case where a taxpayer with a substantial boarding house business might
otherwise elect for the alternative basis on a cessation of trading simply to
avoid a large balancing charge.
The individual must make an election for the alternative basis of computation
(method B) to apply. If there is no election then the normal method of
calculating profits (method A) will apply. Once made an election is effective
for that and subsequent years of assessment until the individual withdraws the
election or the individual becomes exempt.
There is no special form. If the taxpayer’s return is made on the basis of
method B, that may be taken as an election.
Sarah Laing CTA is author of ‘Tottel’s Income Tax Annual 2006-07’,
from which the above article is extracted. The book is one of ‘Tottel’s Core Tax
Annuals 2006-07’. The series is due to be launched in September 2006. Each of
the new Core Tax Annuals costs just £19.95, or all six cost just £99.50! The
Core Set comprises:
- Tottel's Corporation Tax 2006-07;
- Tottel's Capital Gains Tax 2006-07;
- Tottel's Income Tax 2006-07;
- Tottel's Inheritance Tax 2006-07;
- Tottel's Trusts and Estates 2006-07; and
- Tottel's Value Added Tax 2006-07.
About the Author
Sarah is a Chartered Tax Adviser. She has been writing professionally since
joining CCH Editions in 1998 as a Senior Technical Editor, contributing to a
range of highly regarded publications including the British Tax Reporter, Taxes
- The Weekly Tax News, the Red & Green legislation volumes, Hardman's,
International Tax Agreements and many others. She became Publishing Manager for
the tax and accounting portfolio in 2001 and later went on to help run CCH
Seminars (including ABG Courses and Conferences).
She now works as a freelance author providing technical writing services for the
tax and accountancy profession.
Sarah originally worked for the Inland Revenue in Newbury and Swindon Tax
Offices, before moving out into practice in 1991. She has worked for both small
and Big 5 firms. www.taxationweb.co.uk.
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Article Published/Sorted/Amended on Scopulus 2007-03-30 01:36:18 in Tax Articles