How to rent out a room and keep the tax­man happy as well

Yorkshire Post - Property - - PROPERTY -

Rent-a-room re­lief is avail­able for owner-oc­cu­piers and ten­ants who let fur­nished rooms in their only or main res­i­dence. The rules ei­ther ex­empt the in­come from be­ing taxed or al­low it to be taxed on a more favourable ba­sis than rental in­come from other prop­er­ties.

The owner must oc­cupy the prop­erty as their main home at the same time as the ten­ant for at least part of the let­ting pe­riod in each tax year. It should also be noted that the re­lief only ap­plies to res­i­den­tial ac­com­mo­da­tion, so does not ex­tend to, for ex­am­ple, a room let as an of­fice in some­one’s home. How­ever, in some cir­cum­stances it can ap­ply to a guest house.

Whether rent-a-room re­lief can ap­ply is less clear cut where the ac­com­mo­da­tion be­ing let is self-con­tained (such as a base­ment flat). The Rev­enue take the view that the ac­com­mo­da­tion would only qual­ify for the re­lief if the di­vi­sion into a self­con­tained unit is “tem­po­rary”. In es­tab­lish­ing whether the di­vi­sion is tem­po­rary, the Rev­enue would con­sider such fac­tors as whether struc­tural alterations would be re­quired to undo the di­vi­sion, how long the di­vi­sion has been in place, and whether the flat is sep­a­rately sup­plied and me­tered for mains ser­vices and has its own unique postal address.

The re­lief en­sures no in­come tax is payable if the gross rents for the tax year (be­fore de­duct­ing any ex­penses) do not ex­ceed £4,250. Here, gross rents in­clude pay­ments re­ceived for re­lated goods and ser­vices such as meals or laun­dry. It is worth not­ing that this limit has re­mained un­changed since 1998, so its real value has some­what di­min­ished over the years.

Where the in­come is be­low £4,250, the ex­emp­tion would au­to­mat­i­cally ap­ply, but the tax­payer can elect to be taxed un­der nor­mal rules (rents less ex­penses), which may be ben­e­fi­cial, for ex­am­ple, where a loss arises. Elect­ing for rent-aroom re­lief not to ap­ply is made on a year-by-year ba­sis, and is done by no­ti­fy­ing the Rev­enue in writ­ing, or by mak­ing an ap­pro­pri­ate en­try in the Self Assess­ment tax re­turn.

If the prop­erty is jointly owned the £4,250 limit is halved. The most com­mon sit­u­a­tion would be where a mar­ried cou­ple jointly own their home, and in that case they would each have a limit of £2,125 to off­set against their renta-room in­come.

Where the rents ex­ceed £4,250, the tax­payer can elect to use a sim­pli­fied ba­sis of cal­cu­lat­ing the tax­able rents. The ef­fect of this is that the rents to be taxed are only those in ex­cess of the £4,250 limit. If, for ex­am­ple, the rents were £6,000 for the year, the tax­able amount un­der this ba­sis would be £1,750. This ba­sis would tend to be used if the net tax­able rent un­der nor­mal rules (in­come less ex­penses) would be higher than £1,750.

Again, the elec­tion to use this ba­sis is to be made in writ­ing or via the tax re­turn. Once such an elec­tion has been made, it will re­main in place for all fu­ture years un­til it is with­drawn. It is there­fore im­per­a­tive to keep an elec­tion un­der an­nual re­view. The time limit for ei­ther opt­ing out of rent-a-room re­lief or elect­ing for the sim­pli­fied ba­sis is 12 months from Jan­uary 31 fol­low­ing the end of the tax year. For ex­am­ple, the dead­line for the cur­rent tax year ended April 5, 2012 will be Jan­uary 31, 2014. From a non-tax per­spec­tive it is es­sen­tial that be­fore tak­ing in a lodger you no­tify your lender, if there is a mort­gage on the prop­erty, and also your in­surer.

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