• ICAEW
  • KASHFLOW

 

0161 928 3276

 

 

We understand our clients

Rent a Room

Newsletter issue - August 2015.

In the Summer Budget 2015, the government announced that the level of rent-a-room relief will be increased from the current level of £4,250 to £7,500 from April 2016. This means that from 6 April 2016, an individual will be able to receive up to £7,500 tax-free income from renting out a room or rooms in their only or main residential property. The relief also covers bed and breakfast receipts as long as the rooms are in the landlord's main residence.

To qualify under the rent-a-room scheme, the accommodation has to be furnished and a lodger can occupy a single room or an entire floor of the house. However, the scheme doesn't apply if the house is converted into separate flats that are rented out. Nor does the scheme apply to let unfurnished accommodation in the individual's home.

The rent-a-room tax break does not apply where part of a home is let as an office or other business premises. The relief only covers the circumstance where payments are made for the use of living accommodation.

If additional services are provided (cleaning and laundry etc.), the payments must be added to the rent to work out the total receipts. If income exceeds £4,250 a year in total, a liability to tax will arise, even if the rent is less than that.

There are two options if the individual is receiving more than the annual limit a year:

  • The first £4,250 is counted as the tax-free allowance and income tax is paid on the remaining income.
  • Renting the room is treated as a normal rental business, working out a profit and loss account using the normal income and expenditure rules.

In most cases, the first option will be more advantageous.

The principal point to bear in mind is that those using the rent-a-room scheme cannot claim any expenses relating to the letting (e.g. insurance, repairs, heating).

To work out whether it is preferable to join the scheme or declare all of the letting income and claiming expenses via self-assessment, the following methods of calculation need to be compared:

  • Method A: paying tax on the profit they make from letting worked out in the normal way for a rental business (i.e. rents received less expenses).
  • Method B: paying tax on the gross amount of their receipts (including receipts for any related services they provide) less the £4,250 exemption limit.

Method A applies automatically unless the taxpayer tells their tax office within the time limit that they want method B.

Once a taxpayer has elected for method B, it continues to apply in the future until they tell HMRC they want method A. The taxpayer may want to switch methods where the taxable profit is less under method A, or where expenses are more than the rents (so there is a loss).

The individual has up to one year after the end of the tax year when their income from lodgers went over £4,250 to decide the best option to take, so it is worth taking a bit of time to work out which route produces the lowest tax bill, we can help you with this.

 

To work Smarter in your Business Contact Beauchamp Charles

Contact Us

"Join our newsletter for hints, tips and tax advice"

 

What our clients say

Dakins Property Services

Great Results, Personable, High Integrity

Choice Events Limited

All at Beauchamp Charles are very helpful, approachable and easy to talk to. They keep me informed with key dates; I can feel totally confident that I won't ever miss any deadlines! Whoever I deal with, always deal with matters professionally and efficiently and if they are unavailable they get back to me promptly.

FT leisure Ltd

I have worked with Beauchamp Charles as our management accountants for over 20 years and have never received anything less than exceptional service. Their approach is both professional and personal. Finances and particularly tax strategies are a minefield for small businesses; Beauchamp Charles have in-depth knowledge of these area, which is comforting. They pay very close attention to our business activities and have provided financial strategies that have helped our company develop.

Fredrick Thomas Electrical and Maintenance

We have used Beauchamp Charles since company formation back in 1998. Beauchamp Charles offers us a one to one service as they are small enough to offer this dedicated service and large enough to do the work and offer best advice. They get to know us as individuals and a business, always giving sound advice. Frederick Thomas Electrical are in a stronger place thanks to the service we get from them.

Barnes Walker Landscapes Limited

We are a small business and had employed the same accountancy firm for many years. Two years ago we took the decision to switch to Beauchamp Charles after several othe local businesses recommended them very highly to us. We have not been disappointed with the service they have provided to us over these last two years.