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Renting a room in your own home tax benefits and implications



Submitted By: Paul H Conradi of Conradi Morrison & Co - Accountants in Dartford
Category Type: General Interest Article

Date Submitted: 25-09-2007 11:36:14


Introduction

When a homeowner (or a tenant with the landlord’s permission) rents out part of their own home they are potentially liable for both income tax on the rent received and capital gains tax on profits from the sale of their home. However, careful planning using the advice below can minimise or hopefully eradicate the liability for income tax and capital gains tax.

Income tax

Income tax exemption

A homeowner (or tenant) who receives a rental income of up to £4,250 per annum for renting out accommodation to a lodger within their home will be exempt from income tax, this is known as ‘The Rent a Room’ scheme. However there are conditions that must be met to qualify for this exemption: -


  1. Main residence- the income tax exemption only applies to the rental of accommodation within the homeowner’s main residence i.e. the home that they live in most of the time, the exemption does not apply to second homes, holiday homes or buy-to let properties.
  2. The accommodation must be furnished.
  3. The division of the main residence into rental accommodation and homeowner’s accommodation must be temporary however, the size and location within the property of the rental accommodation does not matter.
  4. There must be no rental income from other unfurnished accommodation within the main residence.
If the rental income received exceeds £4,250 per annum the first £4,250 is exempt and the balance is taxable.

Expenses related to rental accommodation

If the homeowner claims the income tax exemption on rental income received they cannot claim tax relief on expenses incurred such as repairs, maintenance, insurance and advertising. However, the homeowner can choose to pay tax on the gross rental income less allowable expenses. This option should be taken when the expenses exceed the rental income received. If the rental income does not exceed £4,250 Rent a Room Relief automatically applies unless the homeowner elects otherwise on an annual basis.

Capital gains tax liability

Generally, when a homeowner sells their main residence they will not pay capital gains tax on any profits due to private residence relief. However, if a homeowner rents out part of their home or has used part of the property for business purposes, such as using one room as an office, taking in lodgers or letting out all or part of the property for a while, they may be liable to pay capital gains tax. Whether or not they still qualify for some private residence relief will depend on their exact circumstances and the type of accommodation provided.

Additional information

  1. Despite the fact that relief is mandatory, rental income must be entered on the homeowner’s personal tax returns by ticking the appropriate box.
  2. If two people (other than spouses) receive rental income from letting furnished accommodation at one main residence, the relief will be split between them equally.
  3. Taxpayers may agree with the Revenue that they should be assessed under Schedule D Case 1 (Trading income) as opposed to being in receipt of unearned rental income. For these fortunate few special rules apply and these should be discussed with a member of our firm.
  4. Married couples can attribute rental income between them in any proportion they choose for the purpose of ‘Rent a Room Relief’ to a maximum of £4250.
Conclusion

A homeowner can take in one or more lodgers tax free (legitimately).

Income tax will only be paid if the rental income exceeds £4,250 per annum. However, the homeowner could be liable for capital gain tax on taxable profits from the sale of the home depending on the type of accommodation provided.

Date Last Modified:- 25-09-2007 12:53:38


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