Rent-a-room at home – is it tax free?

On the face of it, the rent-a-room relief is straight forward: if gross rents from letting out your room are not more than £7,500 in the current tax year, there is nothing you need to do, this income is free of tax; but beware the small print.

Gross rents are defined as the rental income you receive (before deducting expenses) plus any additional contributions you receive from your lodger towards meals, cleaning, laundry or similar costs. So basically you have to total up everything you receive from your tenant and check whether or not it exceeds £7,500.

You cannot use the rent-a-room scheme and claim this exemption at all if:

  • The house where the room is let is not part of your main home.
  • The room is unfurnished.
  • The room is used as an office or for any business (but you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities.)
  • The room is let while you are living abroad.

If your gross rents do exceed £7,500 there are two ways you can use to work out how much tax is due.

  1. Method one is to simply declare your actual profit on your tax return – rents less expenses.
  2. Method two is to pay tax on the difference between your actual rents received and the tax-free limit of £7,500.

The best method to choose will depend on the amount of your rents and expenses. Basically, whichever method produces the lowest taxable income is the one to go for.

Although you are exempt from any tax liability if your gross rents are less than £7,500 (£625 a month), if your costs of letting the room are more than the rents you receive – in other words, if you make a loss – you may be better using method one above, as the losses may be carried forward and used in future years.

And finally, you must advise HMRC by the 31 January following the end of the relevant tax year which method you are using. For the current tax year 2017-18, you would have until 31 January 2019 to notify.

If you are unsure of the best option for you, please get in touch.

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