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Tax Implications of Rent a Room

If you can’t afford to invest in a buy-to-let, why not rent a room in your house to a lodger? It can be a lot less hassle and elderly people often welcome the company. The "rent a room exemption scheme" allows the first £4,250 of gross income from renting to a lodger to be tax free. This has been the threshold for several years and continues to apply during this tax year 2004-05.

A lodger is defined as someone who pays to live in your home, normally with meals provided, and who shares the family's communal rooms. The room you rent to the lodger must be in your principal home, defined as the property you occupy for most of the time.

The £4,250 exemption is reduced to £2,125 if, during any rental period, someone else receives income from letting accommodation in the same property. Also, rent-a-room does not apply to income from accommodation used as an office or for business purposes (other than for bona fide students who may have use of a study in your home).

Holiday home

If you let your home in the UK while you live abroad, you will not normally be eligible for the rent-a-room exemption because the property will not be your main residence during the period of the letting.

But if you move home within the UK during the tax year, both your old and new homes will qualify for rent-a-room relief during the same year. You simply add the rents from both properties to calculate your total income.

If you don’t normally complete a self assessment tax return, you don’t have to do anything about reporting this income to the taxman, providing it doesn‘t exceed £4,250.

Even if you do normally complete a tax return, you only have to tick the relevant box to confirm that your rental income was £4,250 or less in the 2004-05 tax year.

If your rental income exceeds £4,250, you have a choice of two ways to work out your tax. The first is to pay tax on the profit you make from letting the room, less any allowable expenses.

The second method is to pay income tax on the gross amount of your receipts (including receipts for any related services you provide such as laundry and meals), less the £4,250 exemption limit, but without any separate tax relief for allowable expenses or capital allowances.

The first method automatically applies unless you tell your tax office that you want to use the second method. There is a time limit for telling your tax office of 22 months after the end of the tax year to which your decision applies.

If you choose the second method, it will also apply until you tell your tax office otherwise. For instance, you might want to switch to the first method if your taxable profit drops below £4,250, or where your expenses exceed the rental income.

However, if you run a guest house or bed and breakfast business, the taxman will regard this as a trade. The rent-a-room exemption may still be claimed, but you should exclude any assessable profits from your rental business and return them as trading profits.

For more details, see the Inland Revenue’s Help Sheet IR223 which you can access at - click on "practitioner zone" and then on "leaflets and booklets


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Schedule of Articles

property investing
property refurbishment
buying overseas property
moving house
home letting
buy to let
home improvements

top 10 celebrity areas
6 up & comming areas
5 signs that an area is up & comming
city types yearn for the country in town
your place in the sun
equity release
planning permissions & extensions
estate agents
rent or buy
buy to let
mortgage overpayment
mortgage endowments
mortgage protection
stamp duty
self build your home
electrical surveys
the cost of moving in
the perfect neighbourhood
council tax
house price league
good neighbours
stamp duty land tax
top 20 towns 2003
cut the cost of moving
interest rates
buying in scotland
dream homes
first time buyers
the worth of uk homes
bad estate agents
keeping up appearances
home improvements


Please note that articles on this site & any other 'planning-approval' related web site does not constitute professional advice. All articles are intended to provide a general view of many subjects. We suggest you to consult a solicitor before making any important decisions.  The author is not an expert in any given field.

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