Claiming tax relief for renting out a room to a lodger

Do you let a room in your main home out to a lodger?

If the lodger pays you rent (which they're almost certainly doing, otherwise why let the room out), then it's possible you may have some tax to pay on that extra income.

BUT… if the rent is less than £4,250 a year then you can claim "rent-a-room relief" and not put that income on your tax return.

Claiming rent-a-room relief is straightforward. There's a box on the Property page of the tax return which you tick to say you're claiming the relief and Hey Presto you've claimed it.

How is the relief worked out?

The relief is worked out in total for the tax year. So if, for example, you let the room out to a language exchange student who pays you £1,000 per term, and the room stands empty during the university holidays, then you're receiving £3,000 during the year, and you qualify for the exemption.

The £4,250 limit doesn't just cover rent paid, though. It has to cover any other services you provide in connection with the rented room. So if your lodger is paying extra for meals, laundry, etc. then you have to add all that up and make sure the total is under £4,250 a year.

And, if you live with a spouse or partner, the £4,250 is divided between you. So you each get £2,125 of relief.

When does the relief apply?

The relief only applies if you're letting out the room as furnished residential accommodation. You can't claim it if you're letting out a room in your home as office accommodation. The Revenue are wise to that trick - don't try it. But they do realise that lodgers will sometimes work in their rooms (e.g. bringing some papers home from work to read) and they won't refuse you the relief because of that.

The relief also only applies to your only or main home, which can be a caravan or houseboat as well as a bricks-and-mortar property if that's "where friends and correspondents might expect to find you" (HM Revenue's website). So rent from a holiday home or second home doesn't qualify for the relief.

And, if you run a business that involves letting rooms out (e.g. you run a guesthouse, or a B&B) then that counts as a trade and you'll pay tax on the profits of that trade as normal. You can't claim rent-a-room relief in this case.

Rent-a-room relief is available whether you own your home or rent it. Just make sure that the terms of your mortgage or tenancy agreement allow you to rent out a room.

What happens if my rent is over £4,250 a year?

In that case, you can choose to either:

  • Method A: Work out the receipts less any expenses you incurred letting the room (e.g. newspaper ads, laundry, food) and pay tax on the difference, ignoring the £4,250, or
  • Method B: Pay tax on the amount of the total receipts less £4,250, ignoring the expenses.

Method A is the default. If you want to use Method B then you have to tell your tax office. There are some examples here on HMRC's website about which method might suit you better.

Do I have to claim the relief?

You can, though, choose not to claim the relief. Why on earth would you do that? Not claim a relief from Mr Darling, are you joking?

If working out your figures under Method A above would actually give you a loss, then you could choose to do that.

But that loss can only be set against profits you make from letting other properties, or carried forward and put against a future profit from letting the room (or other properties) out. You can't set it against any other income, like your salary, or profit from a non-rental business.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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