The Rent a Room scheme is an optional exemption scheme that lets you receive a certain amount of tax-free 'gross' income (receipts before expenses) from renting furnished accommodation in your only or main home.
You can choose to take advantage of the scheme if you let furnished accommodation in your only or family home to a lodger. (Your only or family home is the one where you/your family live for most of the time. A lodger is someone who pays to live in your home, sometimes with meals provided, and who often shares the family rooms.)
A lodger can occupy a single room or an entire floor of your home. However, the scheme does not apply if your home is converted into separate flats that you rent out. In this case you will need to declare your rental income to HM Revenue & Customs (HMRC) and pay tax in the normal way. Nor does the scheme apply if you let unfurnished accommodation in your home.
No. You can choose to take advantage of the Rent a Room scheme, regardless of whether you are a home owner or are renting your home. However, if you are renting, you should check whether your lease allows you to take in a lodger.
If you're a mortgage payer it's best to check whether taking in a lodger is within your mortgage lender's and insurer's terms and conditions.
If you are both letting furnished accommodation in your joint home, you will each be entitled to receive half of the allowance (up to £2,125 for the 2006-2007 tax year) without paying tax.
If you charge for additional services, you will need to add the payments you receive to the rent, to work out the total receipts. If you get more than £4,250 a year in total, you will have to pay tax, even if the rent is less than that.
There are advantages and disadvantages of the scheme – it’s simply a matter of working out what is best for you.
The principal point to bear in mind is that if you are in the Rent a Room scheme you can’t claim any expenses relating to the letting (for example, wear and tear, insurance, repairs, heating and lighting).
To work out whether you will be better off joining the scheme or declaring all of your letting income and claiming expenses on your tax return you need to compare the following:
If you opt out of the scheme (or simply do nothing) you will pay income tax on the first amount. If you opt into the scheme you will pay tax on the second amount.
HMRC publishes some example calculations to help you decide which method would be best for you.
If you run a bed and breakfast business or a guest house, or provide catering and cleaning services as part of a letting business, the Rent a Room scheme can still apply to you. You will need to complete the relevant parts of the self-employment pages of your Self Assessment tax return.
