If you’re looking for ways to give your bank balance a boost, renting out a room in your house is a good option.
By signing up to the government Rent a Room Scheme, you won’t only benefit from the extra income from rent, but up to £7,500 of this annual income is totally free from tax!
While this is a great option for earning some extra money, it can be easy to get confused about how the Rent a Room Scheme works, what rules need to be followed and how to get started with becoming a ‘resident landlord’.
With so many rules, regulations and jargon-filled information surrounding the Rent a Room Scheme, getting your head around the basics of what it actually is can seem almost impossible.
Not to worry, though – in this Rent a Room Scheme Guide, we’ll outline everything you need to know about renting out a room in your house.
The Rent a Room Scheme is for resident landlords who let out furnished accommodation in their own houses. You are classed as a resident landlord if you rent out part of your main home to a tenant or lodger.
Through the Rent a Room Scheme, you can earn up to a threshold of £7,500 per year tax-free from renting out a room in your house. If you share this income with a partner, or anyone else, it is halved to £3,750.
There are important legal distinctions between resident landlord arrangements and other types of tenant contracts.
For example, a resident landlord’s tenants have more limited rights – they’re not able to challenge the agreed rent, and the landlord doesn’t have to give them as much notice to leave the property.
A resident tenant can make up to £7,500 through the Rent a Room Scheme. But, if they share the income from letting the property with someone else, they can only claim up to £3,750 each.
This Rent a Room Allowance limit covers everything you charge your tenants as part of the rental service. So, if you charge them for cleaning, meals or laundry, you’ll need to include these fees.
This means that, if you use the Rent a Room Scheme, you won’t be able to deduct any expenses from your rental income.
So, now we know what the Rent a Room Scheme is and how much you can earn, are you eligible for the scheme? Let’s find out…
The Rent a Room Scheme is available to owner occupiers or tenants who let out furnished accommodation to a lodger in their main home.
You don’t have to be the homeowner to take advantage of the scheme. You’re also able to sign up to the government Rent a Room Scheme and let out a room to a lodger if you’re renting, as long as your own lease states that you can do so.
You don’t actually need to register to use the Rent a Room Scheme. If your gross receipts from your rental income are less than £7,500, this will automatically be tax free.
According to HMRC, your gross receipts for the tax year include:
If you have made a loss through the Rent a Room Scheme, it may be more beneficial for you to pay tax in the normal way (deducting expenses). If you want to do this, you should let HMRC know.
If your gross receipts exceed £7,500, you can choose how you wish to pay your tax:
HMRC will automatically opt for the first option. So, if you want to pay your tax using the second method, you must let them know.
It’s important that you take the time to assess your situation properly when deciding which option to choose. For example, if you have considerable tax-deductable expenses, you may pay less tax by choosing the first option.
If the amount you earn from renting out a room in your house is less than the thresholds of the Rent a Room Scheme, then your tax exemption will be automatic and you don’t need to do anything.
However, if you earn more than the threshold, you will need to complete a tax return and declare your Rent a Room Scheme income. If this is the case, you can do one of the following:
If you need to request a tax return because you don’t normally receive one, you can contact HMRC to get one.
While the Rent a Room Scheme can be a great way to supplement your income, the income you do receive might affect some means-tested benefits, such as:
If you are on Universal Credit, any money you receive from sub-tenants and lodgers under the Rent a Room Scheme won’t be counted as income up to the tax-free allowance of £7,500. However, anything above this will be counted.
If you were living on your own and qualified for the 25% single person Council Tax Reduction and decide to rent out a room in your house, you will no longer qualify for the discount.
If you are a working age social housing tenant the impact of the Rent a Room Scheme on your Housing Benefit will depend on how the person renting the room is classified.
Before you think about taking in a tenant or lodger, there are a few things you might want to think about…
First, it’s a good idea to get your mortgage lender’s permission to take someone in. And, if you’re a leaseholder, you might need to ask your landlord.
You should also check that your home is safe, with furniture and equipment that meets fire and electrical safety standards. You’ll need to ensure that gas appliances are checked every year by a Gas Safe registered engineer.
It’s also your responsibility to check your tenant’s ‘right to rent’, including their immigration status. If you let property to someone who isn’t legally able to stay in the country, you could be fined.
Make sure you draw up a written agreement and ask your tenant or lodger to sign it. This will ensure that all parties are aware of their responsibilities. You might even want to create an inventory of items in their room and log its condition. This way, you can avoid any disputes when they move out.
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