Renting out property can be a great way to earn extra income, but it's essential to understand the tax implications and potential opportunities to make the most of your earnings.
When it comes to HMRC and property income, there is one scheme dominating headlines: the Rent-a-Room scheme. But how does it differ (if at all) from taxation as a landlord?
In this article, we explore the nuances behind taxation as a landlord under the Rent-a-Room initiative – and explain what might make you eligible to claim it.
What is the Rent-a-Room scheme?
The Rent-a-Room scheme allows you to earn up to £7,500 in tax-free rental income each year. This UK government (HMRC) initiative is aimed at those hoping to let out space within their own homes for extra income.
What are the Rent-a-Room criteria?
You’re eligible to apply for the Rent-a-Room scheme if:
- You’re a resident landlord with a lodger (see below)
- You provide furnished accommodation
- Your rental arrangement “amounts to a trade” (e.g. as a bed and breakfast or guest house, providing meals or housekeeping)
What is a “resident landlord”?
“Resident landlord” is the specific term for a landlord who is letting out part of their primary (or only) home. Resident landlords can make use of the Rent-a-Room scheme if the rental arrangement meets certain criteria (particularly important is that rooms are furnished).
Simply put, all Rent-a-Room landlords are resident landlords, but not all resident landlords are eligible for the Rent-a-Room scheme.
Tenant vs. lodger
When you rent out part of your main home, it’s important to understand the distinction between having a tenant and a lodger. This is because there can be different legal responsibilities, depending on this status.
Definition of a "tenant"
In short, a tenant usually has exclusive access to a room or rooms, and the landlord does not have the right to enter this space without permission from the current tenant (source). This arrangement is usually not eligible for a Rent-a-Room claim.
Definition of a "lodger"
On the other hand, a lodger is usually described as someone without exclusive rights to a space (e.g. due to housekeeping services). This is the expected scenario under the Rent-a-Room scheme, where you are inviting someone into your main home.
See HMRC’s page for the technical details or check out MondaytoFriday’s article for a handy summary.
Is Rent-a-Room different to being a landlord?
Not necessarily. Simply put: all Rent-a-Room scheme users are landlords, but not all landlords can use the Rent-a-Room scheme.
An essential part of Rent-a-Room is that you must be a resident landlord, sharing your main home. There are two categories of resident landlord who are eligible for Rent-a-Room: owner occupiers and tenants.
Rent-a-Room for “owner occupiers”
It's important to remember that a "landlord" does not necessarily need to own the rental property in question. However, if you do own the property being rented out for Rent-a-Room, you are specifically called an “owner occupier”: you own and occupy the property while renting it out.
An owner occupier is a type of resident landlord.
Rent-a-Room for “tenants”
It is also possible to claim Rent-a-Room when you don’t own the property you’re renting out. In this case, you are a tenant who has permission from your landlord to rent out part of the property in which you live. This in turn makes you a landlord (for the person paying you rent).
A tenant eligible for Rent-a-Room is another type of resident landlord (source).
Is it always an advantage to claim Rent-a-Room?
Not always. Being a landlord can take many forms. For instance, you might rent out a property which is separate from your main home. In this case, you are entitled to £1,000 in tax-free rental income annually.
This is considerably lower than the £7,500 allowance under Rent-a-Room – but landlords can generally also claim expenses (unlike Rent-a-Room landlords).
You cannot claim expenses if you also claim under the Rent-a-Room scheme.
How do you pay tax on rental income?
For both Rent-a-Room scheme and other landlord scenarios, you must declare your income and pay tax by completing a Self Assessment tax return (specifically, supplementary page SA105). Read our article about rental income tax for more info.
TL;DR
- Rent-a-Room gives you up to £7,500 in tax-free rental income
- It only applies to resident landlords renting out furnished accommodation to lodgers
- You cannot claim expenses with Rent-a-Room (although other landlords can)
At present, MTD (Making Tax Digital) is transforming how we file Self Assessment. Luckily, we have a blog post specifically explaining MTD for landlords. If you want to get ahead of the curve, start using AbraTax for Self Assessment today.