Rent A Room HMRC

Subletting a room in your house to a lodger can be a great way to use up wasted space and make some cash on the side.

 

The government’s rent-a-room scheme provides homeowners and tenants who let out a furnished room in their house for qualifying purposes to decrease their tax liabilities. You can earn up to £7,500 a year without paying additional tax, although there are certain criteria that must be met in order to qualify for the scheme.

 

In this article, the team at Panthera will cover exactly what you need to know about the rent-a-room scheme.

 

What is rent-a-room?

 

For homeowners, the opportunity to sublet a room in your house can be an attractive money-making prospect, especially thanks to the rent-a-room scheme.

 

To qualify for exemption, the room you let out must be furnished and located in your primary residence. You can charge your lodger for additional services, such as meal provision, laundry, or cleaning.

 

However, if you live in a buy-to-let property which has a spare room or the part of the property you’re looking at letting out has been converted into a flat, the scheme won’t apply.

 

If you and your spouse/civil partner are renting out the room as part of a joint agreement, the maximum tax-free amount you can benefit from is £3,750 per year. As a single person, the maximum amount is £7,500 tax-free rental income.

 

What if the rental income exceeds the threshold?

 

It’s important to note that the £7,500 threshold not only covers rent, but also fees charged for other services. For example, if you charged your lodger £6,000 annually, but included £2,000 of service charges, the £500 above the threshold would become liable for tax.

 

This would need to be recorded and submitted on your self-assessment tax return and would be subject to whichever the relevant rate of tax for you.

 

If rental charges come to £7,500 or less over the course of the tax year, you need not pay tax on the income, nor inform HMRC of it.

 

Do I need to be aware of any additional legalities?

 

Some mortgage lenders do not allow homeowners or tenants to let out parts of their property to generate income.

 

It’s worth checking with your landlord and mortgage provider before starting to sublet a room in your property, as you don’t want to break the terms and conditions of your agreements.

 

Additionally, there’s a possibility that your home insurance company may null your insurance if they find you are subletting to a lodger, without having changed the insurance contract to cover this.

 

Speak to your insurance company prior to accepting your own tenants to find out their position on subletting a room.

 

What’s the difference between buy-to-let and rent-a-room taxation?

 

For buy-to-let properties, you can claim against wear-and-tear costs, such as for the cost of a broken boiler, or professional fees like advertising.

 

If you use the rent-a-room scheme, you won’t be able to reclaim these expenses. So, in some cases, you may wish to opt out of the scheme for a year. You’ll need to decide which scheme you’re implementing before the end of the tax year.

 

For example, let’s say you rent out a room to a lodger and bring in £13,000 a year. This is an annual rental income which falls £5,500 above the tax-free threshold.

 

In this case, the taxable income would amount to charges as follows:

 

Tax Band	Taxation on £5,500
Basic (20%)	£1,100
Higher (40%)	£2,200
Additional (45%)	£2,475

 

Opting out of the scheme, for some people, may be a more profitable choice.

 

Let’s say you had your home rewired and replaced part of your central heating system within a single tax year, and that the bill for both combined came to £5,000.

 

If you were treating the payments made by your lodger as normal rental income, you would be able to take the £5,000 in expenses from the £13,000 in rent. This would leave you with a taxable sum of £8,000 profit, with the taxation charges as follows:

 

Tax Band	Taxation on £8,000
Basic (20%)	£1,600
Higher (40%)	£3,200
Additional (45%)	£3,600

 

In this case, it makes more sense to employ the rent-a-room scheme.

 

On the other hand, let’s say your expenses that tax year came to £10,000, and your profit totalled at £3,000. The charges for this scenario are as follows:

 

Tax Band	Taxation on £3,000
Basic (20%)	£600
Higher (40%)	£1,200
Additional (45%)	£1,350

 

In this case, treating your lodger’s payments as normal income would the better financial decision.

 

Rent-a-room with Panthera

 

The Panthera team are more than happy to help you find out if the rent-a-room scheme would benefit you. Get in touch today on 01235 768 561 or at enquiries@pantheraaccounting.com to discuss this topic in further detail.