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Rent a Room Scheme changes mean strings are attached

Nick Latimer, Partner, Private Clients
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The Rent a Room Scheme allows individuals to earn up to £7,500 a year tax-free from letting out a part of their main residence. This represents an increase from the previous limit of £4,250 per annum, saving 45% additional rate taxpayers an additional £1,500 a year.

With additional pressure on public finances, the Rent a Room Scheme is back on the government’s radar. The conclusions from a recent call for evidence consultation have been announced, which indicate some restrictions on the availability of relief. The restrictions aim to focus the relief on increasing the supply of affordable lodgings, which was the intention of the scheme when it was introduced. The timing of the announcement coincided with the Wimbledon Championships, a period when many locals cash in by renting out their properties to championship fans from all over the world.

Rent a Room Relief as it stands

Rent a Room Relief applies to renting furnished accommodation during a period where the property is the renter’s main residence. There are no requirements relating to the length or type of lodging.

The relief applies to gross income (not including expenses). If the income exceeds £7,500, the taxpayer can either:

  • tax all income (ignoring expenses) in excess of £7,500 or
  • calculate income net of expenses and ignore Rent a Room Relief.

Proposed changes to the Rent a Room Relief

The proposed new rule, which is expected to be implemented from April 2019, seeks to add limitations on the relief without adding to the administrative burden of its operation. This includes requiring “shared occupancy” to prevent people benefitting from the relief by renting out their whole property, while they are not present (when they are on holiday, for example).

The change is anticipated to say that the physical use of the furnished accommodation must overlap in time (wholly or partly) with the use of the residence as sleeping accommodation by the individual or a member of the individual's household. Taxpayers who do not satisfy this test will no longer be eligible to claim Rent a Room Relief, which will apply to each letting or agreement.

Rent a Room Relief or Property Allowance?

Where the rental is not eligible for Rent a Room Relief, it is possible that the new property allowance can be claimed. The new property allowance of £1,000 introduced in April 2017, applies to the letting of commercial property or second/holiday homes.

Examples of eligibility for each relief

  • An individual lets their house (their main residence) during the Wimbledon Championships to a visiting family. If the individual goes on holiday for the whole period of the rental, the receipts from the rental would not be eligible for Rent a Room Relief as there is no shared occupancy during the period of the rental. The receipts would be eligible for the property allowance instead.
  • An individual rents a room in their main residence to a student during term time. If the landlord goes on holiday for a week during the rental period, the receipts would be eligible for Rent a Room Relief as there is shared occupancy for part of the period of the rental.

Crowe comment

The changes to Rent a Room Relief could see an end to tax free income for those who rent their homes during large sporting events and those who use websites such as Airbnb to rent their homes while they are on holiday.

For top rate taxpayers, the relief is worth £3,375 of tax savings and its loss should therefore be planned for. Where possible, and once the final details of the changes have been announced, taxpayers should consider possible changes to their letting arrangements so it falls within the shared occupancy rules.

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Nick Latimer
Nick Latimer
Partner, Private Clients