PIM4001 - Rent-a-room: overview
Rent-a-room applies to income from providing furnished residential accommodation in the taxpayer’s only or main residence. For example, a taxpayer may benefit where they take in a lodger. The rules either exempt rental income or tax it on a more favourable basis.
Under the rent-a-room scheme a taxpayer can be exempt from Income Tax on income from furnished accommodation in their only or main residence if the gross receipts they get (that is, before expenses) are £7,500 or less, see PIM4012. But they can’t then claim any of the expenses of the letting, see PIM4020.
In addition, receipts over the £7,500 exemption limit can be taxed on an alternative basis that may produce a lower tax bill. Briefly, the excess of the gross receipts over the exemption limit is treated as the taxable rental income instead of the actual profit. But they can’t then claim any of the expenses of the letting, see PIM4030.
For the purposes of the rent-a-room scheme, gross receipts include not only rents but also payments made to the taxpayer for the provision of any other goods or services (such as meals, cleaning, laundry) in connection with the letting.
If someone else receives rents from letting in the same residence then the limit is halved to £3,250.
The rent-a-room scheme does not apply to rooms let as an office or for other business purposes, see PIM4002. But the scheme applies to genuine lodgers who study at home or who do some of their business work at home in the evenings or at weekends.
Where a taxpayer has taxable receipts after rent-a-room has applied, they are normally taxable as property income together with the rest of their rental business income (if they have any). In some cases, income from a lodger etc may be taxed separately as a trade (see below).
Rent-a-room applies to people who let a room in a home they rent as well as to people who own their homes. It isn’t relevant for tax but taxpayers may want to check whether:
their lease allows them to take in a lodger (where they rent their home),
their lender minds them taking in a lodger (where they have a mortgage on their home),
their insurance company is content; their cover may not be adequate if circumstances have changed.
The current legislation is in ITTOIA05/S309 and Chapter 1 of Part 7 of ITTOIA05.
The exemption limit is £7,500.
The scheme is for qualifying individuals: ITTOIA05/S785. It does not apply to companies or partnerships. However it can apply when individuals have the income jointly (for instance husband and wife, or civil partners, where there is no partnership).
What income does it apply to?
The scheme applies to income from providing furnished accommodation (or from providing goods and services in connection with that accommodation) in the individual’s only or main residence. This obviously covers income from lodgers. It may also be applied to bed and breakfast or guest house businesses (assessable as trading income) provided that:
the house in which the business is carried on is also the individual’s only or main residence,
the normal rent-a-room conditions are met.
Rent-a-room applies to income otherwise assessable as trading income and/or property income.
It is available whether the residence is owned or rented.
Meaning of residence
a building or part of a building occupied or intended to be occupied as a separate residence,
A building temporarily divided into multiple residences may be treated as a single residence, see PIM4004.
When the taxpayer has more than one home
The main residence test for rent-a-room is a purely factual one: has the residence actually been the main residence at any time in the basis period? The judgement in Frost v Feltham  55TC10 gives some indication of the matters that are relevant in considering whether a property is a main residence. You should look critically at any claim for rent-a-room treatment for second homes and holiday homes. Normally we would expect the main residence to be the property that is the taxpayer’s home for most of the time. In other words, where friends and correspondents would expect to find the taxpayer.
It may not be the property chosen as the main residence for CGT purposes. Nor need it be an owner-occupied property. A rented property may be the individual’s main residence.
The accomodation provided
Only residential accommodation used as such qualifies. There is no relief if, for example, a room in the residence is let as an office or for storage. For guidance on claims that other types of accommodation qualify see PIM4002.
Rent-a-room can only apply if the accommodation is part of the taxpayer’s only or main residence at some time in the basis period. You may meet the argument that the basis period for a year in which the source commences is the year of assessment itself. You should not accept this. The principle is that taxable income must have a source, for example the well-known analogy of the fruit and the tree in Ryall v Hoare 8TC521. The basis period cannot begin before the source comes into existence or continue after the source has ceased.
The source will be:
the letting agreement in property income cases, and
the trade where there is a trade.
Therefore, there can be no rent-a-room relief where the property ceased to be used as the taxpayer’s accommodation before the letting began (or commenced to be used as the taxpayer’s accommodation after the letting ceased), even if that is in the same year of assessment. The rent-a-room legislation permits the identification, within a rental business, of a rent-a-room ‘source’. And rent-a-room applies for a year of assessment. So here, the general three year rule of thumb for gaps between lettings (which applies to rental businesses generally) is not in point, see PIM2510.