Anyone who is considering letting their home or a room in their home should be aware of the tax rules regarding the rental of property and also the rent-a-room relief that may be available to reduce any tax liability.
When a person receives income from the rental of a property in the UK, the net amount (i.e. rental income less certain expenses) is normally taxed as property income and must be declared to HMRC on a self assessment tax return. Details are given in our factsheets ‘Buy to let properties’, click here, and ‘Furnished holiday lettings’, click here. Special rules apply when the landlord is not resident in the UK.
However, the rent-a-room scheme enables individuals to benefit from an income tax exemption where they let a furnished room or rooms in their only or main home for use as living accommodation. Under the scheme taxpayers are exempt from paying income tax on the income they receive from the letting of a room in their house if the gross amount received is less than £4,250 per year
Where gross rents exceeding £4,250 have been received, there are two options available. The amount of £4,250 can be deducted from the gross receipts received, creating a profit which will then be subject to tax, or the landlord can decide to disregard the rent-a-room relief and instead deduct the actual expenses incurred from the gross rents received, as a normal property rental business would. The most beneficial option will of course depend on the level of expenses incurred. Further details are provided in our factsheet ‘Rent-a-room relief’.
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