PIM4010 - Rent-a-room: exemption limits
Summary
The exemption limit of £7,500 is reduced to £3,750 if during the tax year to 5 April, someone else received income from letting accommodation in the same property. This may happen where the taxpayer owns their home jointly with another person. (But see below about basis periods for traders.)
If the period of letting is less than 12 months, the limit of £7,500 is reduced to £3,750 if some other person lets accommodation in the same residence at any time in any period of 12 months which includes that ‘short’ basis period.
Taxpayer moves home during the year
The rent-a-room rules apply to the total gross furnished letting receipts for the tax year from the taxpayer’s own home - ITTOIA05/S788. If they move home, and lettings in both their old and new home qualify for rent-a-room relief during the same year, they must add together the rents from both to find the total receipts. See below for more detail.
It is not necessary for the residence to be the individual's only or main residence throughout the whole of the basis period. But it must be the only or main residence at some time during the basis period - ITTOIA05/S786 (1) (c).
Taxpayer moves abroad
If a taxpayer lets their home in the UK while they live abroad, they will not normally be within rent-a-room. This is because the let property will not usually be a residence of theirs at any time during the basis period for the letting. See below for more detail.
Taxpayer is below the exemption limit
Where the taxpayer is below the exemption limit they are automatically exempt from tax on rents from their home. But they can ask to be taxed in the normal way - that is, on their receipts less expenses. This may be to their advantage where, for example, they have a loss and they would like to use that loss. A similar point may arise where they are taxed on the excess of their receipts over the exemption limit but they actually made a loss.
Lodger provided with services which amount to a trade - basis period
Some lettings may amount to a trade. This is likely to happen where the taxpayer runs a guesthouse or bed and breakfast business or if they provide material services. For example, meals and cleaning: see PIM2068 and PIM4300. If the lettings amount to a trade rent-a-room relief may still be claimed but the taxpayer should exclude any taxable profits from their rental business and return them as trading profits.
The basis period for a rental business must be the tax year itself (the year to 5 April) or the actual period of letting if shorter. But traders can choose a different annual period (generally a period of one year ending on a date in the tax year). Up to April 2023, a 5 April accounting date avoided this issue. The trade basis period rules cease to apply from 6 April 2024 following transitional arrangements in the tax year 2023-24. From the tax year 2023-24 trades must report their income on a tax year basis. See the Business Income Manual from page BIM81200.
Up to April 2023, where the taxpayer’s basis period was not the year to 5 April, the rules applied to the circumstances of the trade’s basis period. That is, halve the limit if another person receives income from the taxpayer’s home during the basis period (and not during the tax year to 5 April). In addition, the rules about ‘short’ basis periods also apply to trades.
Generally, trading profits are computed in the same way as rental business profits. Often in continuing cases there will not be much practical difference between trading treatment and rental business treatment unless there are losses. Normally, trading losses can be set against the taxpayer’s other income but rental business losses generally can’t - see PIM4200 onwards.
Legislation - the exemption limit
The 'basic amount' in ITTOIA05/S789(4) is £7,500.
The limit is halved by ITTOIA05/S789 (3) when someone else other than the taxpayer gets income from the use of residential accommodation in the residence in the same relevant period. A relevant period is the basis period for the income concerned, which will normally mean the year of assessment for rental income or a trade basis period (but see PIM4001). This could happen in two possible ways:
- when more than one person gets income from the use of residential accommodation in the same residence at the same time, or
- where a letting is for less than a full year, and someone else receives relevant sums at another time in the relevant period.
If the income is for less than a year, any period of one year beginning or ending at the same time as the basis period is a relevant period. This prevents abuse by the use of short lettings where the income accrues to more than one person.
Example - more than one person letting at the same time
Three sisters Judy, Pat and Josephine own and occupy as a residence Sandy View during the year ended 5 April 2019. Each lets one room in Sandy View to a lodger. Pat is a qualifying individual but Josephine and Judy are not (Sandy View is not their main residence). Each is assessed as a rental business.
In calculating Pat's rent-a-room limit the basic amount is divided by two (and not by three) because at the same time Sandy View was Pat's main residence Josephine and Judy were letting accommodation in the same residence. So Pat's limit is halved to £3,750.
If Josephine and Judy had also been qualifying individuals their limit would have been £3,750 each.
Individual moves leaving lodger
The are circumstances in which the qualifying individual with a lodger, moves to a new home leaving the old home unsold and the lodger in occupation. Rent from the letting may, in these circumstances, continue to qualify for rent-a-room relief until the end of the basis period during which the qualifying individual moved.
If, after the individual moves, the lodger is allowed the use of the whole house (whether or not extra payment is involved) you can accept that:
the existing source continues,
the basis period does not therefore end at the date of the extension of the occupation,
the rent-a-room conditions are satisfied until the end of the basis period (but no longer).
Mover lets at new home
If the individual starts to let at his new home he or she will also be entitled to a rent-a-room relief in respect of this new letting if the ordinary rent-a-room conditions are satisfied. In that case the total receipts from the old and the new homes in the basis period for the year of assessment are added together in order to compare total receipts with the individual's limit. The individual is not entitled to two full measures of deduction.
What happens when the taxpayer goes abroad or occupies job-related accommodation?
Rent-a-room will not normally apply for taxpayers who are living abroad and letting their home while they are away, since it will not have been their residence at any time during the basis period. The same principles apply to taxpayers who occupy job-related accommodation.
If they were within rent-a-room before they left, you can accept that the relief continues to operate until the end of the basis period for the tax year.
If the letting only begins when the taxpayer leaves, the basis period for the rent-a-room source will only start when the taxpayer ceases to use the property as a residence, so no relief is due at all.
See the example at PIM4015.