Jennifer Adams outlines the tax implications of renting a room to another family member such as a sibling.
Recent statistics show that in 2023, 28% of all young people aged 20 to 34 years were living at home with their parents. Whatever the scenario, having an extra adult in the household means extra costs such as increased utility bills, groceries, and other living expenses, leading many to pay rent.
That’s a relief
There are tax implications in doing so, although if the amount is kept under £7,500, the amount received may be covered by rent-a-room relief.
The rent-a-room relief scheme was introduced in the UK on 6 April 1997, its objectives being to increase the supply and variety of low-cost accommodation, and labour mobility (e.g., enabling workers to use short-term accommodation to move around the country). In addition, by allowing individuals to earn tax-free income from letting out furnished accommodation in their main residence, HMRC's administration has been reduced by simplifying the tax reporting requirements.
Over the years, the threshold has been updated, and as of the tax year 2023/24 (and 2024/25) it stands at a gross amount of £7,500 per year. A quirk in the rules allows more than two persons a share of the property income, with relief being set at £3,750 each. Therefore, should three persons own (and live in) a property together and sub-let a room to a lodger, overall the relief is £11,250 (i.e., 3 x £3,750 relief). There are no National Insurance contributions levied on this income.
The relief is automatically applied, eliminating the need for a claim. The income limit covers all charges relating to the rental service, such as cleaning, laundry, or meals. This simplicity makes the relief accessible to a wide range of homeowners, including those running a bed-and-breakfast or a guest house.
Conditions for the relief
As ever with tax, there are conditions to be met.
The relief cannot be applied where:
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the room is let as office accommodation, a storeroom or a garage;
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the taxpayer is absent from the residence due to working overseas;
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the letting is to or by a company or partnership;
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the residence is permanently divided into two or more residences; or
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the property is buy-to-let, or a holiday let not also occupied by the landlord.
Note that the rules state that the room must be in a property that is the landlord's main residence and as such, a claim could be possible should the landlord rent the property from another (although permission to sublet would be needed from the actual owner).
Rental income less than £7,500
If the rental income is less than the limit, the relief applies automatically, and there is no tax to pay or anything to report. If the sibling does not pay market rent but contributes to household expenses, it might not be considered as taxable rental income for the parents and, as such, non-declarable in any event.
However, if the rent charged is significantly below market rate, HMRC could consider the payment to be an informal gift rather than rent, which may trigger inheritance tax considerations in the future.
Rental income in excess of £7,500
The landlord can still benefit from the scheme should the rental income exceed £7,500 (or more than £3,750 per person where more than one person receives the income).
In this instance, tax is payable on the excess over the rent-a-room limit. This time, the relief is not automatic, and a claim is required via completion of a tax return.
Disapplying the relief
Rent-a-room relief is not compulsory, and the taxpayer may elect to disapply, calculating profits using the usual income less expenses method. Once the election is made for a tax year, it is applied for all subsequent years until such time as it is withdrawn, or the receipts are under the £7,500 (or £3,750) limit and the taxpayer chooses to claim rent-a-room relief.
Under the election, HMRC must be advised within the time limit, which is within one year of 31 January following the end of the tax year. Disapplying the relief is more likely where there is a loss.
Losses
A loss cannot be created by deducting the rent-a-room limit from the gross amount received rather than actual expenses incurred. If a loss has been calculated under the usual income less expenses method, it will be more tax-efficient to opt out of the scheme and preserve the loss, which is then available to be carried forward and set against any future profits. To opt out, a tax return needs to be completed.
Importantly, a loss brought forward from previous years may be deducted from any excess of rental income over the limit in the subsequent years under a rent-a-room claim.
Impact on capital gains tax
HMRC accepts that the letting of accommodation which is an integral part of a main residence will not affect the principal private residence capital gains tax (CGT) exemption when the property is sold.
Note that should more than one property be owned, it is a question of fact which is the main residence. No election is possible, unlike the position for CGT generally.
Renting a room for short periods
The relief is intended to cover short-term rental and is aimed at people who take in lodgers. However, rent-a-room relief is increasingly being claimed by people who let their homes while being temporarily absent (e.g., where the property is near to a major sporting venue, such as Wimbledon). Also, HMRC has been concerned that the relief is being ‘abused’ by the letting out of entire properties via websites such as Airbnb and the property owner temporarily staying elsewhere.
As a result, HMRC undertook a consultation on the workings of the relief in 2018, proposing that it be restricted to situations where the taxpayer was resident for most of the letting period when the ‘lodger’ was paying. However, this condition would have prevented people from claiming the relief whilst they were on holiday and the property remains a main residence; therefore, the relief for such properties remains.
Let whilst absent
The question of whether rent-a-room relief is possible while the taxpayer is away for an extended work period could be denied because to claim, the property must be the taxpayer's main residence.
Whether a property is a 'main residence' is a question of fact, but it may be difficult to prove (e.g., if the taxpayer is working away for an extended period and a room is being rented out). However, rent-a-room relief may still be possible even if HMRC can successfully argue against the property being a main residence.
A property only needs to be a main residence at any time during the 'basis period' for rent-a-room relief to apply. The basis period starts either at the beginning of the tax year or, if later, when the letting begins and ends on the last day of the tax year or, if earlier, when the letting income ceases. Therefore, by allowing a lodger to move in before the owner moves to the 'temporary property', a rent-a-room claim can be valid for that tax year. Equally, the relief will be available for the tax year in which they return so long as the owner moves back while the lodger is still in residence.
Practical tip
Rent-a-room relief is a valuable relief should the conditions apply. Even if not, a measure of tax relief may be possible under the property allowance, which permits annual gross property income to be received of £1,000 or less, with no tax implications.
