In contrast to the tax attack on the buy to let market, the government is keen for us to let out that spare room.
As from 6 April 2016, you can now receive £7,500 of income tax free from letting furnished accommodation in your own home under the ‘rent-a-room’ relief.
The relief applies where you provide furnished accommodation to one or more people in the house or flat where you normally live, whether that is a separate room or shared accommodation.
Some examples of where the relief can apply are:
• The room is let to a student who also uses the room to study
• Your lodger works from the room as well as lives in it
• You let your house while you are temporarily away, as long as you are not actually living in another location
• You don’t own the property, so effectively you are sub-letting part of your rented home
The relief does not apply if:
• The area let is not a furnished room (eg your garage or driveway)
• The room is let as an office not as residential accommodation
• You do not actually occupy the house, even if it is occupied by a member of your family, for example your son or daughter. However, if they receive the rent, the relief does apply.
If the rent is received by more than one person, the limit is £3,750 per person, irrespective of how many people receive the rent. But remember for any recipient of the rent, he or she, must occupy the property.
If the rent received exceeds the rent-a-room limit (the limit was £4,250 prior to 6 April 2016) you can pay tax on the actual profit, ignoring rent a room relief (method A). Alternatively, you can pay tax on the gross rents that exceed the limit, ignoring expenses (method B). To stop or start using method B you must elect by 31 January following the end of the tax year.
Note, if you live with someone and they make a contribution towards the costs of the accommodation, or a family member contributes to household costs, these contributions are not taken into account under the rent a room relief.