Rent a room relief enables you to earn up to £7,500 tax free each year from renting a room in your property.

This means people renting a room and earning less than £7,500 do not need to do anything. The relief will be applied “automatically”. This means if the income is less than £7.5k, then no tax return is required at all (providing you don’t already need to file one to declare other taxable income).

However, if you earn over this threshold, you will need to file a tax return and pay tax on this amount.

Tax treatment and your options

It is important that people renting rooms fully understand their tax position and the options available to them.

• If the combined sum of rental income generated by your private residence is less than the rent a room threshold, tax is not payable on the revenue.
• If the income is shared between two people, such as with a spouse or partner, the relief is split between the individuals. In other words, the threshold is halved to £3,750.

What happens when you exceed the threshold?

If your gross receipts exceed the threshold, you will need to file a tax return. However, you may still be able to benefit from the scheme.

There are two methods offered by HMRC to calculate taxes owed.

1. You can opt to pay tax on your total income (receipts) minus any expenses and capital allowance (i.e. your actual profit).
2. You can also pay tax on any gross receipts that exceed the rent a room limit. In other words, your total income minus the £7500 (£3,750 if ownership is shared). It is important to remember you will not be able to deduct any expenses or capital allowances this way.

The first of these methods will be used automatically by HMRC to work out your tax. If you wish to use the second method, you must let HMRC know.

What if you make a loss?

If you are making a loss – it might be a beneficial to pay tax normally on your receipts less expenses.

Who is rent a room relief available to?

Rent a room relief is available for a few different types of property, most commonly for individuals renting a room in their own residential property, as well as bed and breakfast establishments or guest houses.

The relief is not available if you have converted your home into separate domiciles/flats.

Rent a room relief example

Below is a quick example of the rent a room relief scheme in practice. This is deliberately simplistic and for illustrative purposes only.

You rent a room of your house and charge £180 a week for rent. You also receive contributions for utilities.

• Gross receipts for year: £9,800 (£9,360 for rent, £440 for utilities)
• Total expenses for the year: £8,000
• If you pay tax on your average profit, you will be taxed on £1,800 (£9,800 - £8,000)
• If you pay tax on gross receipts over the limit, you will be taxed on £2,300 (£9,800 - £7,500)

When is it better to use your expenses and running costs?

If you run a bed and breakfast or guest house, it is really important to explore whether it’s better to use your expenses and running costs rather than using the flat £7,500 relief.

For example: If you make £25,000 running a B&B, it is likely the expenses involved with this would far exceed £7,500. If this is the case, it may be more tax efficient to deduct these expenses rather than opt for the £7,500 relief.

What about AirBNB?

Rent a room relief can also be applicable if you have hosted an AirBNB; however, to qualify for the scheme, the property must be your main residence.

If you own the property and let it out un-hosted (i.e. you do not live there), this would classed as a Furnished Holiday Let, and would therefore not be eligible for the rent a room relief.

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Gravitate works with lots of property owners, helping them stay compliant and maximise their tax positions through the options made available by HMRC. If you would like to learn more about rent a room relief, or any other property matters, please get in touch.