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Letting property

Rent a room

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Not everyone wants to buy an investment property, or let out their whole house. There are many thousands of households around the country where a single room in a property is rented out to a lodger. The government has special rules regarding the taxation of income under the rent a room scheme.

The rent a room scheme allows you to let part of your home and generate a tax free income of up to £4,250 per year. This equates to a monthly rent of just over £350. If you generate more than this level of income, you are taxed on the gross rent you receive in excess of £4,250.

When you are renting out property, you can usually deduct the cost of many associated expenses from your 'profit' for tax purposes. Bear in mind that if you only let out part of the property then you may only deduct the proportion of the expenses that related to the let part of the property and not the total amount spent on the property. However, if you are within the rent a room scheme, you lose the right to deduct expenses from your rental income, as it is not considered a commercial venture.

Just because you are letting a room out to a lodger, this does not force you to be in the rent a room scheme. There are circumstances where you are better off being outside it. For instance, if you rent a room for £7000 having spent £10,000 on renovations, you would be better off not being part of the scheme. Under the scheme, you would have £2750 worth of taxable income (£7,000 minus the £4,250 tax free allowance). Outside the scheme and under the normal rules, you would have no taxable income due to the expenses incurred (which are tax deductible), and may even be able to carry forward the loss to a future year, or offset it against profits from some other venture.

You will normally be within the rent a room scheme unless you tell your tax office you wish to be out of it. You must tell them by January 21 22 months after the end of the tax year. Having been outside the scheme, you must tell your tax office if you wish to return to it.

If you share ownership of the home but only one of you receives rental income from letting part of it, then the whole income tax exemption goes to the person receiving the rent. If you let a room jointly or each of you let a separate room then each gets half the exemption. This means that you both have half of the £4,250 income tax free allowance.

If three or more people let a room jointly, the rules change slightly, with all three being entitled to an allowance of £2,125. This doesn't occur all that often as ownership of a property is rarely shared between three people.

Income for ancillary services such as providing meals or washing can be added to your rental income and incorporated into the rent a room scheme. However, you should check with your accountant that this does not qualify as carrying on a trade, as this would put you outside the bounds of the rent a room scheme.

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