What are the tax implications for renting out your own property?
The basic position is that income from renting out property is taxable. However, rent a room (RaR) relief allows you to earn up to £7,500 a year from letting out accommodation in your home tax free.
There are a number of conditions to be met for RaR relief to apply. In particular, the accommodation must be:
- – furnished;
- – a UK residence; and
- – your only or main residence for all or part of the income period
This last condition raises some interesting points:
- – the property does not have to be owned by you, a rented property can meet the requirement;
- – claims for RaR on second homes and holiday homes will be looked at critically by HMRC; and
- – RaR relief might not apply if you are going abroad for work, even if only temporarily.
The RaR scheme exempts gross rental income of up to £7,500 per tax year. Note that this is the limit per individual, not per lodger. It’s also worth bearing in mind that the limit is halved if income is shared with your spouse, partner or another person (i.e. you will only get £3,750 per annum each).
If your gross rents are equal to or less than your RaR limit then there is no tax to pay. This exemption applies automatically, and you will not have to file a tax return (unless already required to for other reasons). Alternatively, you can elect to be taxed on your rental profit under normal principles – this is normally only worthwhile if you have expenses which would tip you into a loss.
If your gross rents are above your RaR limit, then you have a choice of either:
- – calculating the taxable profit / loss in the normal way; or
- – electing to only be taxed on your receipts above the RaR limit (without deducting expenses).
For example, if you had a RaR limit of £7,500 and received £10,000 of gross income, you could choose to either:
- – deduct your allowable expenses and be taxed on your profit; or
- – elect to be taxed only on the £2,500 of income which exceeds your RaR limit.
Elections to only be taxed on the excess over the RaR limit need to be made by the first anniversary of 31 January following the end of the tax year (i.e. 31 January 2022 for the 2019/20 tax year).
Does the rent a room scheme apply for a whole house rental or just a single room rental? If so how?
RaR relief applies to both whole house and single room rentals.
It was previously announced that whole house rentals would be denied RaR relief. However, following consultation the proposal was dropped and the whole house restriction instead applied to capital gains tax principal private residence (PPR) relief.
How is the property income allowance treated alongside the rent a room scheme?
The property allowance provides for £1,000 per annum of property income to be received tax free. It works in a similar way to RaR relief – if gross income is under £1,000 it is tax free and there is no need to file a return. If it is over £1,000, the taxpayer can choose to deduct allowable expenses in the normal way or just be taxed on their excess income over £1,000 (without deducting expenses).
However, you cannot claim both RaR relief and the property allowance – it is either one or the other.
In particular, if your gross income exceeds the RaR limit you cannot use the property allowance to offset the excess.
In addition, if you have income which is eligible for RaR but have instead decided to deduct allowable expenses (i.e. because you are below the RaR limit but elect out of the exemption, or you are above the RaR limit and do not elect to be taxed on your excess) then you cannot claim the property allowance. This is to prevent people both claiming the allowance and deducting actual expenses.
There is therefore often a decision to be taken as to whether to claim RaR relief or the property allowance on property income. As the RaR limit is much more generous, it will normally make sense to opt for that provided you qualify, but each situation should be judged on its own merits.
What are the pitfalls of renting out your property over the festive season?
Having a lodger or short term renting of the whole house should not affect the capital gains tax relief available when you come to sell your home provided you do not acquire another main residence whilst away from the property. However, be careful with whole house lets from April 2020, when it is proposed that letting relief under PPR will no longer be available.
- – Besides tax there are other practical issues which you may wish to consider, including:
- – impact on council tax / business rates.
- – whether your mortgage lender places any restrictions on renting out the property or a room.
- – whether your existing insurance will cover you.
- – the potential impact on any claim for Universal Credit or other means tested benefits.