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