Do I need to pay tax on the room I am renting out?

Martin Copland
Martin Copland
Promoted by Ashdown Hurrey

I have recently started renting out a room in a property I own using an online hosting website. I am now booked up for most of the summer period but I am not sure what that means in terms of the tax I will need to pay on this income.

I have heard that I may not have to pay any tax on this but I do not know if that is correct. Can you give me some information on when that might be the case?

Mrs P – St Leonards

Answer:

The tax treatment of this income all depends on whether the property or room being rented out is part of your main residence or if it is a separate property, such as a buy-to- let.

Assuming the property being rented out IS part of the main residence where you live, then you may qualify for the Rent-a- Room scheme. To qualify, the space being rented out must be:

Within your main residence where you live; Furnished; and Rented on a residential basis only, not for business purposes.

Rent-a- Room relief gives a £7,500 tax-free allowance in addition to any other tax allowances you may receive. However, this is not an allowance on the profits from renting the room out; it is an allowance on gross rent received before you deduct any expenses.

In addition, the allowance is £7,500 per property not per individual, so the allowance would be split say if you and a spouse received the income from the room jointly.

If you do qualify for Rent-a- Room relief on this income, you do not need to declare this on a tax return as the income is automatically exempt, although you may choose to do so.

If your rental income exceeds £7,500 in a tax year, you do have to declare this income and you have two options of how to treat it for tax purposes:

1. Take the rent received and deduct the £7,500 tax-free allowance. You cannot claim any expenses if you use this option.

2. Calculate rental profits in the standard way, i.e. by deducting allowable expenses from gross rent received.

If the property being rented out IS NOT part of your main residence, i.e. is a buy-to-let property that you do not live in, you will not qualify for the Rent-a- Room scheme. Instead you will treat the profits (rent received less allowable expenses) like any other property rental income and declare this on an annual tax return.

In addition, if the buy-to- let property is furnished and available for letting through the year, it may qualify as a Furnished Holiday Let on which you may be able to claim further reliefs.

Advice:

As this area can be quite detailed and is case specific, I recommend that you contact an accountant to determine which tax treatment applies to your individual circumstances. Ashdown

Hurrey can advise on this matter in addition to other tax, accountancy and business matters.

Contact Martin Copland on 01424 720222 or email him at martinc@ashdownhurrey.co.uk.