Tax Implications
of Rent a Room
If you can’t afford to invest in a buy-to-let, why not rent a room in
your house to a lodger? It can be a lot less hassle and elderly people often
welcome the company. The "rent a room exemption scheme" allows the first
£4,250 of gross income from renting to a lodger to be tax free. This
has been the threshold for several years and continues to apply during this
tax year 2004-05.
A lodger is defined as someone who pays to live in your home, normally with
meals provided, and who shares the family's communal rooms. The room you
rent to the lodger must be in your principal home, defined as the property
you occupy for most of the time.
The £4,250 exemption is reduced to £2,125 if, during any rental
period, someone else receives income from letting accommodation in the same
property. Also, rent-a-room does not apply to income from accommodation used
as an office or for business purposes (other than for bona fide students
who may have use of a study in your home).
Holiday home
If you let your home in the UK while you live abroad, you will not normally
be eligible for the rent-a-room exemption because the property will not be
your main residence during the period of the letting.
But if you move home within the UK during the tax year, both your old and
new homes will qualify for rent-a-room relief during the same year. You simply
add the rents from both properties to calculate your total income.
If you don’t normally complete a self assessment tax return, you don’t
have to do anything about reporting this income to the taxman, providing
it doesn‘t exceed £4,250.
Even if you do normally complete a tax return, you only have to tick the
relevant box to confirm that your rental income was £4,250 or less in
the 2004-05 tax year.
If your rental income exceeds £4,250, you have a choice of two ways
to work out your tax. The first is to pay tax on the profit you make from
letting the room, less any allowable expenses.
The second method is to pay income tax on the gross amount of your receipts
(including receipts for any related services you provide such as laundry
and meals), less the £4,250 exemption limit, but without any separate
tax relief for allowable expenses or capital allowances.
The first method automatically applies unless you tell your tax office that
you want to use the second method. There is a time limit for telling your
tax office of 22 months after the end of the tax year to which your decision
applies.
If you choose the second method, it will also apply until you tell your tax
office otherwise. For instance, you might want to switch to the first method
if your taxable profit drops below £4,250, or where your expenses exceed
the rental income.
However, if you run a guest house or bed and breakfast business, the taxman
will regard this as a trade. The rent-a-room exemption may still be claimed,
but you should exclude any assessable profits from your rental business and
return them as trading profits.
For more details, see the Inland Revenue’s Help Sheet IR223 which you
can access at www.inlandrevenue.org.uk - click on "practitioner zone" and
then on "leaflets and booklets
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Please note that articles on this site do not constitute regulated
financial advice, which recommends a course of action based upon the specifics
of your personal circumstances. The articles are intended to provide general
personal financial information. We urge you to consult an Independent Financial
Adviser (IFA) before making any important decisions about your finances.
Call 0800 085 3250 for details of IFAs in your local area. Any statement
regarding financial services products and tax liability is based on legislation
and tax practices as at 1 January 2004, which is, of course, subject to
change.The value of any tax benefits or reliefs depends upon the individual
circumstances of the investor.When investment performance is mentioned you
should remember that past performance is no guarantee of future performance.
Where products have an underlying investment content, in many cases the value
of the investment can fall as well as rise. For with-profit based investments,
there is no guarantee as to the level of bonuses that will be declared, if
any. Where mortgages or secured loans are explained do remember that your
home is at risk if you do not keep up repayments on a mortgage or other loan
secured on it. All mortgages are subject to underwriting, status and are
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