Rent-a-room: exemption limits
The exemption limit of £7,500 is reduced to £3,750 if during the tax year to 5 April, someone else received income from letting accommodation in the same property. This may happen where the taxpayer owns their home jointly with another person. (But see below about basis periods for traders.)
If the period of letting is less than 12 months, the limit of £7,500 is reduced to £3,750 if some other person lets accommodation in the same residence at any time in any period of 12 months which includes that ‘short’ basis period.
The amounts of £7,500 (and £3,750) in the preceding paragraphs apply for the year 2016-17 onwards.
For 1992-93 to 1996-97 the limits were £3,250 (and £1,625).
For 1997-98 to 2015-16 the limits were £4,250 (and £2,125).
Taxpayer moves home during the year
The rent-a-room rules apply to the total gross furnished letting receipts for the tax year from the taxpayer’s own home - F2A92/SCH10/PARA2 (for years up to 2004-05) and ITTOIA05/S788 (for 2005-06 onwards). If they move home, and lettings in both their old and new home qualify for rent-a-room relief during the same year, they must add together the rents from both to find the total receipts. See below for more detail.
It is not necessary for the residence to be the individual’s only or main residence throughout the whole of the basis period. But it must be the only or main residence at some time during the basis period - F2A92/SCH10/PARA4 (for years up to 2004-05) and ITTOIA05/S786 (1) (c) (for 2005-06 onwards).
Taxpayer moves abroad
If a taxpayer lets their home in the UK while they live abroad, they will not normally be within rent-a-room. This is because the let property will not usually be a residence of theirs at any time during the basis period for the letting. See below for more detail.
Taxpayer is below the exemption limit
Where the taxpayer is below the exemption limit they are automatically exempt from tax on rents from their home. But they can ask to be taxed in the normal way - that is, on their receipts less expenses. This may be to their advantage where, for example, they have a loss and they would like to use that loss. A similar point may arise where they are taxed on the excess of their receipts over the exemption limit but they actually made a loss.
Lodger provided with services which amount to a trade - basis period
Some lettings may amount to a trade. This is likely to happen where the taxpayer runs a guesthouse or bed and breakfast business or if they provide material services. For example, meals and cleaning: see PIM2050 and PIM4300. If the lettings amount to a trade rent-a-room relief may still be claimed but the taxpayer should exclude any taxable profits from their rental business and return them as trading profits.
The basis period for a rental business must be the tax year itself (the year to 5 April) or the actual period of letting if shorter. But traders can choose a different annual period (generally a period of one year ending on a date in the tax year). Taxpayers will usually find their tax computations easier if they stick to a 5 April year.
Where the taxpayer’s basis period is not the year to 5 April, you apply the rules to the circumstances of the trade’s basis period. That is, you halve the limit if someone else gets income from the taxpayer’s home during the basis period (and not during the tax year to 5 April). In addition, the rules about ‘short’ basis periods also apply to trades.
Generally, trading profits are computed in the same way as rental business profits. Often in continuing cases there will not be much practical difference between trading treatment and rental business treatment unless there are losses. Normally, trading losses can be set against the taxpayer’s other income but rental business losses generally can’t - see PIM4200 onwards.
Legislation - the exemption limit
The ‘basic amount’ is set by F2A92/SCH10/PARA6 at:
- £3,250 for 1992-93 to 1996-97.
- £4,250 for 1997-98 to 2004-05.
The ‘basic amount’ is set by ITTOIA05/S789 (4) at:
- £4,250 for 2005-06 to 2015-16.
The ‘basic amount’ in ITTOIA05/S789(4) was amended by the Income Tax (Limit for Rent-a-Room Relief) Order 2015 to:
- £7,500 for 2016-17 onwards (unless a different amount is prescribed by a further Treasury order for later years).
The limit is halved by F2A92/SCH10/PARA5 (4) (for years up to 2004-05) and ITTOIA05/S789 (3) (for 2005-06 onwards) when someone else other than the taxpayer gets income from the use of residential accommodation in the residence in the same relevant period. A relevant period is the basis period for the income concerned, which will normally mean the year of assessment for rental income or a trade basis period (but see PIM4001). This could happen in two possible ways:
- when more than one person gets income from the use of residential accommodation in the same residence at the same time, or
- where a letting is for less than a full year, and someone else receives relevant sums at another time in the relevant period.
If the income is for less than a year, any period of one year beginning or ending at the same time as the basis period is a relevant period. This prevents abuse by the use of short lettings where the income accrues to more than one person.
Example - more than one person letting at the same time
Three sisters Judy, Pat and Josephine own and occupy as a residence Sandy View during the year ended 5 April 2004. Each lets one room in Sandy View to a lodger. Pat is a qualifying individual but Josephine and Judy are not (Sandy View is not their main residence). Each is assessed under as a rental business.
In calculating Pat’s rent-a-room limit the basic amount is divided by two (and not by three) because at the same time Sandy View was Pat’s main residence Josephine and Judy were letting accommodation in the same residence. So Pat’s limit is halved to £3,750.
If Josephine and Judy had also been qualifying individuals their limit would have been £3,750 each. The fact that total exemptions or deductions in that case might have extended to £11,250 (3 x £3,750) is irrelevant.
Individual moves leaving lodger
The are circumstances in which the qualifying individual with a lodger, moves to a new home leaving the old home unsold and the lodger in occupation. Rent from the letting may, in these circumstances, continue to qualify for rent-a-room relief until the end of the basis period during which the qualifying individual moved.
If, after the individual moves, the lodger is allowed the use of the whole house (whether or not extra payment is involved) you can accept that:
- the existing source continues,
- the basis period does not therefore end at the date of the extension of the occupation,
- the rent-a-room conditions are satisfied until the end of the basis period (but no longer).
Mover lets at new home
If the individual starts to let at his new home he or she will also be entitled to a rent-a-room relief in respect of this new letting if the ordinary rent-a-room conditions are satisfied. In that case the total receipts from the old and the new homes in the basis period for the year of assessment are added together in order to compare total receipts with the individual’s limit. The individual is not entitled to two full measures of deduction.
What happens when the taxpayer goes abroad or occupies job-related accommodation?
Rent-a-room will not normally apply for taxpayers who are living abroad and letting their home while they are away, since it will not have been their residence at any time during the basis period. The same principles apply to taxpayers who occupy job-related accommodation.
- If they were within rent-a-room before they left, you can accept that the relief continues to operate until the end of the basis period for the tax year.
- If the letting only begins when the taxpayer leaves, the basis period for the rent-a-room source will only start when the taxpayer ceases to use the property as a residence, so no relief is due at all.
See the example at PIM4015.