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Rent-a-room: Letting a room in your home


If you let a furnished room or rooms in your only or main home, you can choose to join a rent a room scheme. This allows you
to receive the first £4,250 a year tax free, or £2,125 if you are letting jointly.  But you cannot claim expenses on running the
property or any capital allowances.

Rent-a-room relief
- Your lodger can occupy a single room or a whole floor of your home , but it cannot be seperate flats.
- You can join the rent-a-room scheme even if you are renting the property yourelf: you do not have to own it, but you do need
  to operate within the terms of the lease (which may specify that you cannot have a lodger). 
- If you have a mortgage, check whether renting out a room is within the insurere's terms and conditions.
- You have to include any extra sums, such as charges for meals, cleaning or laundry to give a total figure for receiptsfrom
  your  lodger.
If you dont' normally receive a tax return and your receipts are below the tax free thresholds, you do not have to do anything.
If your receipts go above the threshhols, you must tell the tax office.
So, for example, three joint owners could claim £6,375 between them.

Anything you charge your tenants for food, hous-keeping, laundry must be added to the rent received when you calculate your gross rents, and you can’t deduct expenses.
If your gross income is below the rent-a-room limit

If you receive more than £4,250 (or £2,125) you can choose either to :
  • A: pay tax on your profits in the normal way for a rental business (by paying tax on your actual profit after deducting expenses); or
  • B: pay tax on your gross income less the £4,250 (or £2,125) limit, with no allowance for expenses.
Method A vs method B
Method A applies automatically unless you tell your tax office that you want method B to apply.
To work out which method is best for you, calculate your expenses. If they are less than £4,250 (or £2,125) you’ll be better off with method B.
 
Changing methods
 
There’s nothing to stop you changing methods from year to year but each time you change you must tell HMRC by 31 January, 22 months after the end of the tax year. There isn’t a special form, making appropriate entries on your tax return using one or other method is sufficient.
Example: The landlord is better off with rent-a-room
 
Norman charges his lodger, Jane £450 a month rent to share his house. As the annual rent of £5,400 is more than the rent-a-room allowance (£4,250) Normal has to decide how to deal with the income.

If he stays in the rent-a-room scheme, over a year £4,250 of Jane’s rent will be tax-free. That leaves £1,150 to be taxed at Norman's's top rate of tax, which is 20%. So he pays tax of £230 on Jane’s rent for the year.
 
Rent Room
Rental income Amount
Rent-a-room allowance £5000
Profit -£4350
Tax payable = £2900 x 20% £580
Rental Income
Calculation Amount
Rental income £5400
Rent-a-room allowance -£2500
Profit £2900
Tax payable = £2900 x 20% £580
Tell your lender and insurers
If you take in a lodger, you must tell your mortgage lender or landlord and your to make sure you aren’t breaching the terms of your mortgage, lease or insurance.
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