Rent A Room Scheme

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

4th March 2022

HMRC's £7,500 Rent a Room Scheme UK

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 Rent a Room UK scheme’s objectives 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 individuals renting out a room in their homes.

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 UK scheme requires the tenant or guest to access the homeowner’s facilities. A separated flat whereby the tenant or guest with their washing, sleeping, and eating facilities would be considered 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.

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What are the basics of the Rent a Room Scheme UK?

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 UK 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 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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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 primary 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
– HMRC scrutinises second homes and holiday homes
– 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 Rent a Room Scheme UK tax rules 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 UK?

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

Some people can outweigh this 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 UK 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 UK.

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.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

Free online tax calculators

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

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 UK.

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.

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