Other tax issues
Do you sub-let a room in your house to a lodger? This page is for you.
If you sub-let a furnished room in your own home to a lodger, you may be able to benefit from the ‘rent-a-room’ scheme.
Income from renting out a room to a lodger may qualify for ‘rent-a-room relief’, if:
- your gross income from renting out the room does not exceed £7,500 for the tax year 2019/20 (£7,500 for 2018/19), before the deduction of any expenses;
- the source of the income relates only to one residence; and
- the following conditions are met:
- the income arises from the letting of furnished accommodation in a ‘residence’ in the UK, or from associated goods and services, for example providing meals, cleaning or laundry services to a lodger;
- the house in which the room is let is your only or main residence; and
- if it were not for the rent-a-room relief, the income would be taxable, either as trading income, property income or miscellaneous income.
If all of the above conditions are met, the income is exempt from tax and you cannot claim any deductions for related expenses. You do not need to do anything for the exemption to apply; it will apply automatically unless you ‘opt out’.
You may wish to opt out of the rent-a-room scheme if you have made a loss – that is, your expenses are more than your property income. You may prefer to be taxed on the normal basis for property income, so that you can claim and use the loss.
The government has recently consulted on the rent-a-room scheme and has decided to leave the scheme largely unchanged. However, it says it will take steps to clarify the purpose of rent-a-room relief, which is to support those with spare rooms to take in lodgers.
What if my rent-a-room income exceeds £7,500 for any one tax year?
If you meet all of the conditions for rent-a-room relief above, but your gross property income exceeds £7,500 for 2019/20 (£7,500 for 2018/19), you do not qualify for the automatic exemption.
However, you can make an election to be taxed on an ‘alternative basis’. The taxable amount will then be the gross rent received, which includes any payments received for meals and services, less £7,500 for 2019/20 (£7,500 for 2018/19). You cannot claim any deductions for related expenses.
This election must be made to HMRC in writing by 31 January, in the second year after the end of the relevant tax year. For example, if you wish to opt in to the ‘alternative basis’ for the tax year ended 5 April 2019, you must make the election by 31 January 2021. In practice, you would usually do this by ticking the relevant box on your Self Assessment tax return that you want the relief to apply. Filing your tax return by the usual filing deadline will be accepted by HMRC as the relevant notification.
You may not wish to elect to be taxed on the ‘alternative basis’ if you have made a loss – that is, your expenses are more than your property income. You may prefer to be taxed on the normal basis for property income, so that you can claim and use the loss.
What if the rent-a-room income is split between my spouse/partner/flatmate and me?
If you and another person are due to receive property income from the same property, then the allowance is shared equally between you. The above tests and conditions still apply, but the threshold in each case is £3,750 instead of £7,500. This applies irrespective of the split in actual or beneficial ownership of the property. This means that if your rent-a-room income exceeds £3,750, then you can elect to be taxed on the ‘alternative basis’, and if it does not exceed £3,750, then it is automatically exempt.
A quirk in the rules is that even if more than two of you are due to share the property income, you still each get relief for up to £3,750. Therefore, if three of you own (and live in) a property together and sub-let a room to a lodger, overall you get 3 x £3,750 relief – that is, £11,250!
Do I need to complete a tax return?
You may need to complete a tax return if you have income from renting out a room which is taxable, although sometimes HMRC can collect the tax on a small amount of rent against your Pay As You Earn (PAYE) code if you are an employee or a pensioner.
More information on needing to complete a tax return can be found in our separate guidance on this topic.
You should therefore tell HMRC about any taxable income from renting a room – contact them as soon as possible, but at the latest by 5 October following the end of the tax year concerned. For example, if you start getting taxable income from renting a room in the year to 5 April 2020, tell HMRC by 5 October 2020.
Where the 5 October deadline is missed, you should still tell HMRC as soon as possible. As long as any tax due is paid on time (normally by the tax return deadline of the following 31 January), there will be no ‘potential lost tax revenue’ and no penalty to pay for having missed the 5 October deadline.
Where can I find more information on rent-a-room relief?
HMRC’s detailed, technical guidance on rent-a-room relief can be found in their Property Income Manual.