Property Developers, Property Investors

HMRC’s £7,500 Rent a Room Scheme

simon

Simon Misiewicz

22nd October 2021

HMRC's £7,500 Rent a Room Scheme

HMRC’s Rent a Room Scheme was introduced in 1992 to incentivise homeowners and property investors to let out spare rooms in their homes.

According to HM Treasury, since the Rent a Room Scheme was first launched, the UK’s Private Rental Sector has more than doubled in size. The emergence of multiple online platforms enables those with spare accommodation to find potential lodgers.

The scheme aimed to increase the availability of low-cost rented accommodation across the UK.

One of the objectives of the Rent a Room Scheme was to make it easier for individuals to move around the country for employment purposes.

It also gives a £7,500 tax-free income incentive to those renting out a room.

The tax-free threshold of £7,500 per year applies to letting out furnished accommodation in your home.

This allowance is halved if you share the income with a partner or spouse.

You can opt into the scheme at any time if you’re a resident landlord or if you run a B&B or a guest house.

You cannot use the scheme for homes that have been converted into separate flats. This is because the rent a room scheme requires the tenant or guest to have access to the homeowner’s facilities. A separated flat whereby the tenant or guest that has their own washing, sleeping and eating facilities would be considered to be in their own “dwelling”. This arrangement is covered by the buy to let the method of taxation.

Read this informative helpsheet on the Rent a Room Scheme from HMRC.

The frequently asked questions about the Rent a Room allowance

As property accountants, we are regularly asked about tax-free income from a property. We will look to answer the below questions in this Article.

“Are you paying too much property tax?”

“Should I speak to an accountant about the Rent a Room Scheme?”

“What are the basics of the Rent a Room Scheme?”

“How can I earn £7,500 tax-free property income?”

“Who is eligible for the Rent a Room Scheme?”

“What are the pros and cons of the Rent a Room Scheme?”

“Can I claim Rent a Room allowance on AirB&B rentals?”

“What if my income exceeds the £7,500 Rent a Room allowance?”

“Is Rent a Room better than paying tax on rental profits?”

“Can I opt-out of the Rent a Room scheme?”

“How does this affect Hong Kongers that are looking to move or invest in the United Kingdom from Hong Kong?”

“How does this affect American readers that are looking to move or invest in the United Kingdom from the United States?”

“How does this affect our British readers that are looking to move or invest in either the United States or Hong Kong?”

Are you paying too much property tax?

Our property tax specialists help over 1,000 monthly retained UK landlords and property investors to minimise tax whilst building their wealth.

There are many reasons why people pay far more income tax than they need to.

This is because:

-They do not know what they do not know.

-They have not spoken to a tax specialist to go through their situation to see what tax reliefs are available to them.

-Their accountants or solicitor are not aware of the many reliefs available to their clients and are not taken advantage of.

-Tax legislation changes but either the person or their accountant/tax specialist have not been made aware.

Should I speak to an accountant about the Rent a Room Scheme?

HMRC’s Rent a Room Scheme gives a tax-free £7,500 income allowance which appears simple enough to navigate.

But it might still be worth speaking to a property tax specialist to ensure your tax liability doesn’t increase.

The tax exemption is automatic if you earn less than £7,500.

If you earn more, you must complete a tax return.

You can then opt into the Scheme and claim your tax-free allowance. This is done on your tax return.

You can also choose not to opt into the scheme and instead record your income and expenses on the property pages of your tax return.

There are pros and cons of opting in or out of the Rent a Room Scheme.

It depends on your circumstances as a homeowner or a property investor with a portfolio of rented properties.

It is worth getting expert property tax advice to ensure you make the right decisions.

We’ve produced a free and informative video on YouTube outlining the tax benefits of the Rent a Room Scheme.

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What are the basics of the Rent a Room Scheme?

As property accountants serving thousands of UK landlords that purchase buy to let properties, we know that our property investors and landlord clients are keen to maximise their rental incomes.

According to industry sources, the tax relief claimed under the Rent a Room Scheme has tripled in the last decade.

The average rent for a spare room in the UK is currently £587 per month, according to SpareRoom.

This monthly amount equates to £7,044 per year, which means most room-based landlords wouldn’t be required to pay any tax on the income gained.

The scheme enables homeowners to let out at much of their home as they wish, as long as it is their primary residence and they continue to live there.

The allowance cannot be claimed by those who let their property completely and move elsewhere.

From 6th April 2016, the amount of relief available under the Rent a Room Scheme increased from £4,250 to £7,500, which provided a powerful incentive to many individuals who could receive rental income from a lodger.

You pay tax on your actual profit, meaning total receipts less any expenses.

Examples of expenses include insurance, maintenance, repairs and utility bills.

If you’re unsure of your tax position regarding the Rent a Room scheme, speak to one of our property tax experts today.

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How can I earn £7,500 tax-free property income? 

The Rent a Room Scheme, allows owner-occupiers to receive tax-free rental income if they provide furnished accommodation in their main or only home.

The annual Rent a Room tax relief amount is £7,500.

The allowance is the same if you let accommodation for less than 12 months.

You can let out a room or part of your main property, which could include a whole floor but not a self-contained flat.

Unfurnished rooms do not qualify for the scheme.

You can use the Rent a Room Scheme as a tenant if you have your landlord’s consent.

The exemption is automatic if you don’t usually fill out a tax return and the income is below the £7,500 allowance (about £625 a month).

Government information about the Rent a Room Scheme can be found here.

Who is eligible for the Rent a Room Scheme?

The main points to remember if you’re considering using the Rent a Room Scheme and are unsure if you’re eligible are:

– It must be your only or main residence in the UK
– You can’t deduct any wear & tear costs against the letting
– The room cannot be used for business purposes
– Permission must be gained from your mortgage advisor
– Your home insurer will also need to give permission
– Second homes and holiday homes are scrutinised by HMRC
– The scheme might not apply if you go abroad to work

The scheme is open for owner-occupiers and tenants who have gained permission.

HMRC has provided more details about the tax rules of the Rent a Room Scheme that are worth reviewing.

To discuss your tax position concerning the scheme, speak to our property tax accountants today.

What are the pros and cons of the Rent a Room Scheme?

The main advantage of the scheme is that you can earn £7,500 a year tax-free.

This can be outweighed by some people because you cannot claim any expenses related to the letting.

Any money spent on repairing wear and tear in the property or for major expenses such as replacing a broken boiler is not tax-deductible as expenses against income gained under the Rent a Room Scheme.

If you spent more on decorating a room and keeping it in good order than you make in rent under the scheme, you would end up making a loss and wouldn’t be liable for tax.

The scheme will not always be tax-efficient or profitable if gross rental receipts are below the Rent a Room Scheme limit and automatically exempt from tax.

Where expenses exceed rental receipts, and the landlord makes a loss, the benefit will be lost under the Rent a Room Scheme.

Where a loss arises, it can often be carried forward and used against future rental business profits.

The ability to use the loss may be beneficial if the landlord lets out other properties on which they make a rental profit, or if it is likely that in the future, the rental receipts from letting rooms in his home will exceed the £7,500 allowance, giving rise to a taxable profit.

To discuss whether the Rent a Room Scheme is tax-efficient for you, contact our team today.

Can I claim Rent a Room allowance on AirB&B rentals?

The Rent a Room Scheme is applicable for short-term rentals, so you can claim the allowance if you run a B&B, a guest house or AirB&B (holiday lets). There are many UK tax benefits of running a holiday let property business.

Alternatively, homeowners letting rooms on AirB&B can claim a tax-free property allowance of £1,000 per year.

This cannot be claimed at the same time as the scheme allowance.

Homeowners who choose to let a room up to the maximum of 90 days per year will find the Rent a Room Scheme more beneficial, while the property allowance could be a better alternative for people letting out other assets such as their driveways or allocated parking spaces.

If you’re unsure which route to take, contact one of our property tax accountants today.

What if my income exceeds the £7,500 Rent a Room allowance? 

If you receive more than £7,500 per year from a lodger, you’ll need to complete a tax return.

When completing the property section of your return, you can decide how you’d like the income to be taxed.

You can pay tax on your profits in the usual way for a rental business by paying tax on your actual profit after deducting expenses.

You might decide to take £7,500 tax-free and then pay income tax on any excess rent.

The simplest way to work out which method is best for you is to calculate your expenses.

If they’re larger than the scheme allowance, then declare the profits in the normal way.

If they are smaller than the £7,500 threshold, go for option two.

You do not have to stick with one method each tax year. You can change annually, so long as you inform HMRC.

Check out our income tax calculator to see how your income might be impacted by the Rent a Room Scheme.

Is Rent a Room better than paying tax on rental profits? 

Unless you tell HMRC otherwise, they will assume that your rental income will be taxed under the normal rules.

Using the Rent a Room Scheme forfeits your right to claim expenses, but you gain the £7,500 tax-free allowance.

To discuss your tax position and get the best property tax advice, speak to one of our team today.

Can I opt-out of the Rent a Room scheme?

If you want to opt out of the Rent a Room Scheme, you must tell HMRC by 31st January after the end of the tax year in question.

This can be done by informing HMRC directly or through the property section of your tax return.

You will need to opt out of the scheme every time you submit a tax return to be eligible.

There is no particular form for telling HMRC you don’t want to be part of the Rent a Room Scheme.

If you earn more than the £7,500 threshold or have already completed a tax return, declare the relevant lettings income and expenses when filling out your tax return.

To discuss your tax position regarding the Rent a Room Scheme, speak to one of our property tax specialists today.

How does this affect Hong Kongers that are looking to move or invest in the United Kingdom from Hong Kong?

Given the £7,500 income is tax-free from the UK perspective, Hong Kongers do not need to worry about paying tax to the Inland Revenue Department (IRD) in Hong Kong either.

There are two reasons for this:

– The £7,500 rent a room allowance is free from tax

– The IRD in Hong Kong does not tax you on worldwide investment income

Learn more about our International services to help Hong Kongers move or invest in the United Kingdom.

How does this affect American readers that are looking to move or invest in the United Kingdom from the United States?

The £7,500 is rent-free from an HMRC UK tax perspective.

The same does not apply to the Inland Revenue Department (IRS) in the US. This is because the rent a room allowance is a tax incentive to house people. The IRS will not have the same concession in the United States.

Any rental income that you earn in the United Kingdom will still be taxed by the IRS in the United States.

Learn more about our International services to help Americans move or invest in the United Kingdom.

How does this affect our British readers that are looking to move or invest in either the United States or Hong Kong?

The Rent a Room allowance is based upon tax-free income on your home if you have a lodger.

The UK property will no longer be your home once you decide to move to another country.

This means that the £7,500 Rent a Room allowance will no longer be an option. The rental income that you make in the property will be subject to UK tax by HMRC.

Learn more about our international tax services to help British people that wish to invest or move to the United States or Hong Kong.

You may be interested in our main Article on Self-assessment tax returns or our other Article where we focus our efforts on how much income tax you need to pay to HMRC.

You may also be interested to know more about our tax saving services for UK landlords and property developers.

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