Reshma Johar explores a useful relief which aims to encourage individuals to let out rooms in their only or main residence in the UK.
Rent-a-room receipts can include more than rent for the use of furnished accommodation in a residence. It can also include receipts in respect of goods or services (i.e., meals, cleaning and laundry) supplied in connection with that use.
Generally, receipts will be treated as part of a UK property business. However, in certain cases they can be treated as trading income.
Is it a ‘residence’?
‘Residence’ includes:
- a building or part of a building occupied or intended to be occupied as a separate residence; and
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a caravan or houseboat.
It can also include a building, or part of a building, which has temporarily been divided into two or more separate residences. In this case, it is still treated as a single residence.
The relief does not apply to rooms let out as an office or for any other business purpose, such as storage.
The individual limit
The basic amount is £7,500 for a tax year. The available individual limit depends on whether the person meets the exclusive receipts condition (broadly, this is where someone else is also entitled to the rent-a-room receipt).
If the condition is not available, the limit is halved.
The mechanics of the relief
The form of relief an individual can utilise depends on the total rent-a-room amount. If the amount of rent-a-room receipt in a tax year is equal to or less than the individual limit, the receipts are treated as nil and are not assessable to income tax. An election to disapply can be made. This would usually arise if the individual made a loss.
If the receipts exceed the individual limit, the individual will be assessable to income tax. The individual has a choice of how the receipts are assessed:
- The alternative method: This only considers rental income, as it excludes any associated expenses. This method will tax the total rent-a-room receipts, less the individual’s limit (either £7,500 or £3,750). This is subject to an election (NB see ITTOIA 2005, s 796 on the alternative calculation of profits for trading income).
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The default method: This is calculated in the ‘normal way’ for property letting businesses (i.e., total rental income less associated expenses).
Other factors to consider
There is a £1,000 tax-free allowance for individuals. This was introduced to make it easier for individuals to earn a small amount of income from renting out or sharing their property. However, the relief cannot be claimed in conjunction with rent-a-room relief.
In addition, the cash basis is currently the default method applied when reporting rental income and expenses of a property business. The cash basis applies where cash receipts do not exceed £150,000 in a tax year.
Making an election
An election is required if the individual does not want exemption from income tax as the gross rental receipts are less than the individual’s limit; or if they want to be assessed on the alternative method.
An election needs to be made via the self-assessment tax return on or before the first anniversary of the 31 January following the year of assessment. Elections can with withdrawn within the same time limits as above.
An election for the alternative method continues to be in force for subsequent years until it is withdrawn.
Practical tip
As the relief provides flexibility on how receipts are assessed, individuals should consider this annually.
