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Landlord Advice

Rent a Room Scheme: How It Works and Tax Rules

June 4, 2020

Renting out a room in your flat has its advantages. On the social side, having someone there to hang out with, cook with and share experiences with can help counteract feelings of isolation and make your daily life more enjoyable. On the financial side, it goes without saying that having someone to split the bills and flat expenses with makes things easier. The extra earnings derived from taking in a tenant are a welcome addition to one’s usual income. Plus, thanks to the 1992 Rent a Room Scheme, landlords can enjoy a tax break of up to £7,500 on this extra income. Sounds interesting? Keep reading for more information and to check if you qualify for the scheme.

Am I eligible for the scheme?

The Rent a Room Scheme is a measure put in place by the Government to encourage landlords by giving them a tax break. The scheme is aimed at residential landlords who rent out a furnished accommodation to a lodger in their main residence. You do not need to own the property you are renting out to be eligible for the tax break - both owners and tenants can qualify.

For example, if you are the tenant of a 2-bedroom flat and rent out the second room to a lodger, providing your lease allows you to take in a lodger, you could benefit from the scheme. This means you could get a tax break of up to £7,500, even if you let out the accommodation for less than 12 months. To be eligible for the scheme, the accommodation that you are providing must be part of your main residence. The scheme is therefore only available to landlords who provide accommodation to lodgers, not tenants. Although the terms are sometimes used interchangeably, there is a difference between a lodger and a tenant. Simply put, the main difference between the two terms is that a lodger resides in the same property as the person they are renting the room from, while a tenant does not.

Accordingly, only live-in landlords are eligible to opt in. Eligibility is also contingent on whether the room is furnished or if it is used for business purposes - the rented accommodation needs to be furnished, and used for residential purposes only. Additionally, you cannot participate in the scheme if you are living abroad while renting your main residence in the UK.

What if I make more than the threshold?

If you meet all the conditions mentioned above, you are eligible to opt in and benefit from the tax break accorded by the scheme. As long as you earn £7,500 or less per year from renting out the accommodation, you will not be required to pay tax on this amount. Keep in mind that the threshold of £7,500 should be calculated per property. In the case where another person is earning income from letting out the same property, the threshold amount will be divided between the landlords.

For example, if you and your partner both get income from renting out a room in your flat, each of you can get £3,750 tax-free. If you earn more than £7,500 per year from renting out a room, you can still benefit from the scheme, but will have to declare the amount and pay some tax. Monitor the total amount you are earning from letting out the accommodation, including rental payments, income received for services and balancing charges. For example, if you provide services such as cleaning, meals or laundry to your lodger, the income you receive from offering these extra services should be included in the total amount.

Make sure you stay organised and keep track of everything - it’s better to do it step by step throughout the year than scrambling at the last minute when taxes are due. If you’d like us to help with this, find out more about how we can help with landlord tax returns.

Landlords who exceed the £7,500 limit will pay taxes using one of two methods. With the first method, you pay tax on your actual profit, which is calculated by subtracting your expenses and capital allowances from your total receipts. With the second method, you pay tax only on the gross receipts over the £7,500 threshold. When using the second method, you cannot deduct any expenses or capital allowances. You can choose to pay tax using your preferred method, and this can be changed from year to year.

This enables you to choose the method that is more advantageous depending on your yearly earnings and expenditures. Every year, you need to warn HMRC within the time limit (31st January) if you want to use the second method. Otherwise, you automatically have to use the first method.

What should I check before I take in a lodger?

For the first-time landlords out there, there are some things that you need to know before renting out your property. For instance, if you are the property owner and have a mortgage, you should check with your mortgage lender to make sure that you are authorised to rent out a room under the terms of your contract. Same goes if you are a tenant - you should ensure that your lease agreement allows you to take in a lodger.

There are also financial considerations associated with renting your property. Indeed, if you live alone, having a lodger might affect your council tax, as an extra person in your household could mean that you are no longer eligible for the 25% tax reduction known as the Single Persons Discount. Before jumping in, all of these important considerations should be taken into account. Meet all the requirements to apply? You can start earning tax-free rental income today. For further information, make sure you visit the Government’s Rent a Room Scheme page, and if you are uncertain about navigating this, seek professional advice.

Do I need a tenancy agreement?

Whatever the type of property you let out, whether it’s a second residence or your spare room, it’s advisable to have a tenancy agreement in place. This will protect you, your property and the tenant, and in many cases, it's a legal requirement to have a tenancy agreement in place. For private landlords who don't want to use a high street estate agent, we offer a range of services which will make renting out your property legally compliant as well as less of a headache. Find out more about that here.

Final thoughts

Meet all the requirements to apply? You can start earning tax-free rental income today. For further information, make sure you visit the Government’s Rent a Room Scheme page.If you’re interested in finding out more about other options when it comes to renting your property, such as Airbnb management or long-term lets, or if you'd like to hear about the other services we provide, give us a call today on 0207 099 4000. You can find out how much you could charge for rent with our instant rental valuation tool.

We already know how much your rental property is worth. Type your postcode to find out and get an online valuation within 60 seconds.

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