I have just moved house and now find myself with a spare room which I am considering letting out to a lodger. Will I have to pay tax on any rent received from them as I have heard that I can claim Rent a Room relief, is this correct?
Mrs K, Hastings
If you are letting out part of a property that is your main home, then you are deemed to be a resident landlord and ultimately will be liable to pay tax on any rental profits made from letting out part of your home, writes Martin Copland
The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home and you can let out a room or an entire floor.
The amount you receive from the lodger will determine whether you are required to complete a tax return, and you must include any contributions received in respect of household bills.
From 6 April 2016, if you receive less than the Rent a Room relief allowance of £7,500 (£625 per month) in a tax year, then you are not required to submit a tax return to H M Revenue & Customs. However, if your property is jointly owned by two people then this amount will reduce to £3,750 per person. This tax exemption is applied automatically if you are receiving less than the threshold.
Should you receive more than the current threshold in the tax year, you must complete a tax return and you can choose to opt into the scheme and claim the tax-free allowance by filling in the appropriate box on your tax return.
You can register for a tax return by phoning H M Revenue and Customs or by submitting a form online.
If your gross receipts in the tax year do exceed £7,500, you are able to choose whether you pay tax on your actual profit by taking your gross receipts and deducting expenditure incurred on the property, e.g. a proportion of mortgage interest, electricity/gas, etc., or you can choose to pay tax on the amount after taking the gross receipts less the £7,500 exemption mentioned above.
It is very important to establish whether you are able to take in lodgers if you are only renting or own a leasehold property and if you own your property, you should always check with the mortgage providers to establish if they have any objections to you taking in lodgers. You should also ensure that you have adequate insurance cover in place.
If you are unsure and would like to discuss your circumstances in greater detail, Ashdown Hurrey can advise on personal tax matters in addition to other tax, accountancy and business matters. Contact Martin on 01424 720222 or email him at firstname.lastname@example.org.