Rent-a-room tax relief, or the Government’s Rent a Room Scheme, allows you to earn up to £7,500 per year tax-free from letting furnished accommodation in your home.
So how does it work?
The tax exemption is automatic if you earn less than the threshold. This means that you don’t need to do anything. If you earn more than the threshold, you must complete a tax return. From 6th April 2016, this threshold is £7,500. Be aware that for the 2015-16 tax year, the threshold was £4,250. You can then opt into the scheme and claim your tax-free allowance – you do this on your tax return.
Who does the scheme apply to?
The Rent a Room Scheme applies only to landlords who let a furnished room to a lodger in their own home, or to those who run a guesthouse or bed and breakfast.
Short-term lettings, such as those found on Airbnb, are also covered.
However, if you plan to create separate residences that will no longer be part of your home – for instance, if they have their own entrances and facilities – you will not be covered by the scheme.
There is an exception if you let furnished accommodation in a self-contained flat where the divisions of the room are temporary.
There are no strict rules about what constitutes a temporary division, but HM Revenue & Customs (HMRC) will question how long the partitions have been in place and how long they are intended to remain. You will also be asked to state whether the separate residence has its own address and entrance.
If you plan to install kitchens and bathrooms in the property, it will be difficult to argue that the divided residences are temporary.
Unfurnished rooms and rooms that are being used by others as an office are also disallowed. Landlords who let rooms while they are abroad are also unable to claim the tax relief.
Rent-a-room tax relief is perfect for live-in landlords, but you must be aware that the scheme is currently under review for short-term lets.