Newth Talks Tax: Renting a room out in main home
Renting a room out in main home
Jennifer enquired whether, when a room in a residence is rented out, the person receiving the rental income can claim expenses against the income such as a proportion of the mortgage interest and insurance etc.
Simon Sweetman replied in the affirmative, but remarked that it may be better to claim the non-taxable rent a room relief of up to £4,250.
Paul Soper confirmed that this was correct, and added that, if the rent is marginally over £4,250 a year, the owner has the choice of paying tax on the excess over £4,250 or working out the net profit less expenses in the usual way.
Rent a room relief was introduced by para.2 of Schedule 10 to the Finance(No.2) Act 1992, and is now contained in section 788, ITTOIA 2005 in respect of years 2005/2006 onwards. Apart from the legislation, useful information on the subject can be obtained from the HMRC Property Income Manual at PIM4001 and PIM4011 and HMRC Helpsheet IR223.
Basically a taxpayer may claim rent a room relief where they let furnished residential accommodation to a lodger. If the gross receipts amount to £4,250 or less then the relief may be claimed and the rent is exempt from tax. As stated above, where the rent is a little over £4,250 a year, the taxpayer may elect to be taxed on the excess rather than work out the profit on a rent less expenses basis.
It should be emphasised that the £4,250 includes all payments made to the taxpayer, inclusive of meals, cleaning and laundry. Similarly the taxpayer must make the decision as to whether to make the claim, taking into account all direct expenses such as food, laundry and clearing, and a proportion of the household expenses such as mortgage interest, council tax, insurance and other items.
Where two people share ownership of the property the £4,250 exemption is divided between them. It should also be emphasised that the relief is given for 'furnished residential accommodation'. The bright idea of letting one room as an office will not work, whether it is to one's own company or a third party. The relief is available to taxpayers who rent a room in their own homes, as well as those who own them. It does not apply to trading companies or partnerships.
It should also be noted that the rent a room relief applies to the home where the taxpayer is resident, and this could be extended to a caravan or houseboat. Where the taxpayer owns more than one property, the question as to which is the residence is a matter of fact, and will not necessarily follow the 'private residence' rules of capital gains tax. Losses cannot be claimed under the rent a room scheme, and finance charges will only be taken into account if the taxpayer accepts tax liability under the normal profit and loss basis and does not claim rent a room relief.