On the face of it, the rent-a-room relief is straight forward: if your gross rents from letting are not more than £7,500 in the current tax year, there is nothing you need to do, this income is free of tax; but beware the small print.
Gross rents are defined as the rental income you receive (before deducting expenses) plus any additional contributions you receive from your lodger towards: meals, cleaning, laundry or similar costs.
You cannot use the rent-a-room scheme if:
The house where the room was let is not part of your main home when you let it.
The room was unfurnished.
The room was used as an office or for any business – you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities.
The room is let in your UK home and is let while you live abroad.
If your gross rents exceed £7,500 there are two ways you can work out how much tax is due.
Method one is to declare your actual profit on your tax return – rents less expenses.
Method two is to pay tax on the difference between your actual rents received and the tax-free limit of £7,500.
The best method will depend on amount of your rents and expenses. Whichever method produced the lowest taxable income is the one to use.
Although you are exempt from any tax liability if your gross rents are less than £7,500 (£625 a month), if your costs of letting the room are more than the rents you receive – in other words, if you make a loss – you may be better declaring your rents and expenses, method one above, as the losses may be carried forward and used in future years.
And finally, if you want to use method one or two, you must advise HMRC by the 31 January following the end of the relevant tax year. For the current tax year, 2017-18, you would have until 31 January 2019.
If you are unsure which is the best option for you to use, we can help.