PIM4040 - Rent-a-room: losses

Summary

Losses can’t be created under the rent-a-room scheme. So, if a customer is under the exemption limit or they are taxed under method B, any actual loss they make can’t be relieved unless they tell HMRC within the time limit that they don’t want rent-a-room to apply.

But any losses outstanding from earlier years when the customer’s rents were not within the rent-a-room scheme are not wasted. If there are losses brought forward they are set against the taxable profit from the rent-a-room letting, whichever way it has been calculated. They are dealt with as follows:

• Suppose the customer’s gross receipts from letting in their own home in the current year are no more than £7,500 (or £3,750) and they therefore have no tax to pay on that income. Here the full amount of any losses from an earlier year can be brought forward and set against any other rental business profits of the current year. If there are no other rental business profits in the current year, the losses can go forward to be set against the first rental business profits of a later year. The losses are not reduced because rent-a-room exempts or reduces the tax bill for the year.
• Suppose the customer’s gross receipts from letting in their own home are more than £7,500 (or £3,750). Here the earlier losses can be set against their net rental profits in the normal way, however the taxable profits are calculated. That is, whether the income from letting in their own home is computed under method A or B and whether or not there is any other letting. For example, suppose the customer has no other lettings and they chose method B. Here their rental business profits will be the excess over £7,500 (or £3,750) and it is this excess amount that will absorb any losses. Any remaining losses will then be allowable against the taxable rental business profit of the following or later year, however calculated.

What to do if there is a loss

The rent-a-room calculation cannot produce a loss. But where there is an actual loss in the year from letting within rent-a-room, the customer will be able to claim the loss by setting against other property business income and carry forward any remaining loss to a following year in one of the following ways.

• If gross receipts are below the individual’s limit, opting out of rent-a-room: ITTOIA05/S799.
• If gross receipts are above the limit, withdrawing any election for the simplified method B (see PIM4030) calculation: ITTOIA05/S800 (5).

PIM4050 deals with time limits for these elections.

You can find full guidance about rental business losses in PIM4200 onwards.