Britons are increasingly renting out their spare rooms to lodgers, and benefitting from considerable tax relief in the process.
The amount of tax relief claimed under a Government scheme for those renting out rooms has nearly tripled in the past 10 years, according to MHCLG data obtained by the property management firm Houst.
The total tax saved under the Government’s Rent a Room Scheme has increased by 187 per cent since 2009, with a record amount of £140.5million being declared in 2018/19.
Data obtained by Houst through an FOI request revealed a record amount of £140,500,000 was declared over the 2018/19 period, up from £48,800,000 in 2008/09.
The Rent a Room Scheme enables homeowners or tenants to earn up to £7,500 each year tax-free by renting out a room within their home.
With the average rent for a spare room in the UK sitting at £587 per month or £7,044 per year, according to SpareRoom, the majority won’t be required to pay any tax on the income received.
The tax exemption is automatic if you earn less than £7,500, meaning you won’t need to complete a tax return if you earn less than that.
There are some rules to watch out for if you want to qualify for the exemption, however.
‘You don’t have to own the home in order to qualify, but you will need the permission of your landlord to sub-let,’ says Lucy Cohen, founder of online accountancy firm Mazuma.
|Tax Year||Total value of relief declared in tax return||Rent-a-room relief threshold|
‘And you must be a ‘resident landlord,’ meaning that you let out part of a property that is also your only or main home.’
In addition, the tax-free allowance reduces to £3,750 if someone else receives income from letting accommodation in the same property, such as a joint owner.
The surge in landlords taking advantage of the tax relief has occurred partly because the amount of relief available under the scheme increased from £4,250 to its £7,500 in 2016/17.
It has been helped by the ease with which people can now use technology platforms to advertise a spare room.
‘Thanks to the digital solutions of the last decade, homeowners are now able to fill their properties quickly and efficiently, whether that be a spare room or a second home, and generate a secure and regular source of income,’ says Tom Jones, co-founder and chief commercial officer at Houst.
Renting out a spare room to a lodger can be an easy way to boost your personal income
‘Given the enormous economic uncertainty, people are increasingly viewing personal assets as a vehicle to drive up their incomes by turning their homes into money-making properties.
‘Whether it’s renting a room or offering up an entire home to Airbnb renters, spare spaces are becoming an increasingly popular means by which anyone can set up their own side hustle.’
How does the Rent a Room Scheme work?
The scheme enables homeowners or tenants to let out as much of their home as they want, as long as it is their principal residence and they continue to live there.
Any person who earns more than £7,500 from a lodger in a given tax year must file a tax return and stipulate that they qualify for the allowance.
The relief cannot be claimed by those who let their property in its entirety and move elsewhere.
The rules you need to be aware of
Lucy Cohen of Mazuma replies:
1) It must be your only or main residence in the UK
2) While you can let out as much of your house as you wish, you can’t deduct any of the costs for wear and tear against the letting
3) You also cannot rent out a room under the scheme if the room isn’t furnished
4) The room cannot be used for business purposes
5) If you own the home, you’ll need permissions from your mortgage advisor to proceed
6) You’ll also need permission from your home insurer whether you rent or own the property
7) You can’t be part of the scheme if you’re renting out a self-contained flat
8) The property does not have to be owned by you, a rented property can meet the requirement
9) Claims for Rent a Room allowance on second homes and holiday homes will be looked at critically by HMRC
10) Rent a Room relief might not apply if you are going abroad for work, even if only temporarily
It is also important to note that a homeowner cannot use the scheme if the room being let is not part of their main home or is not furnished.
‘The Government’s Rent a Room scheme is a brilliant way of earning some extra cash for a spare room,’ says Cohen.
‘It’s a surprisingly flexible scheme and very low-maintenance in terms of reporting for HMRC purposes.
‘You can use the scheme if you are a resident landlord, whether you own your own home or not,’ said Cohen.
‘You can also use the scheme if you run a B&B or a guest house.’
Is it always worth using the scheme?
There are some landlords who might be better off avoiding the Rent a Room scheme, however.
For example, those that use the scheme cannot deduct any expenses relating to repairs or utility bills against the rental income.
Letting agent’s fees
Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
Buildings and contents insurance
Interest on property loans
Maintenance and repairs (but not improvements)
Rent, ground rent, service charges
Services you pay for, such as cleaning
Direct costs of letting the property, e.g. phone calls, stationery and advertising
If they have faced major repairs costing more than the £7,500 tax-free allowance, they may be better off opting out of the scheme and instead recording all their allowable expenses against the rental income.
When doing so, it is vital that homeowners keep any records and receipts to prove their expenses, in case HMRC was to investigate.
Allowable expenses that can be claimed to reduce tax include, utility bills, insurance, and any maintenance or repairs, although it cannot include improvements.
‘If you are earning more than £7,500 per year or have high expenses related to the rental, the tax-free advantage might be outweighed by the fact you cannot claim any expenses related to the letting,’ says Tram Abramov, chief executive of online tax preparation platform, Tax Scouts.
‘If you have to spend money repairing wear and tear in the property, or replacing a broken boiler, you won’t be able to deduct any expenses against income if you let out your property under the Rent a Room scheme.’
Don’t get caught in a capital gains tax trap
Renting to more than one lodger may mean you’ll be liable for capital gains tax when you come to sell the property.
This is because HMRC considers you to have run parts of your home as a lettings business by having taken in more than one lodger.
But if you only ever let to one lodger, you will not be liable for any capital gains.
You can find out more about the capital gains implications of having more than one lodger here.
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