Under the Rent-a-room Scheme, you can earn up to £7,500 a year tax free if you let out a furnished room, or even a whole floor (but not a separate flat), in your home to a lodger. ‘Woohoo,’ you may say. Yes, but there are a few things to watch out for to keep woohoo from turning into whoops:
- If you claim this allowance, you can’t deduct any expenses. You have to include all extra charges such as cleaning, bills, meals and laundry to give the total figure for rental income from your lodger. So if you have a lot of expenses, you may be better off not claiming the Rent-a- room allowance but treating the whole lot as ordinary rental income instead, from which you then deduct expenses to arrive at a taxable profit. Every year you can use whichever option works better for you
- You don’t have to fill in a tax return if you earn less than £7,500 from your lodger – the allowance will then automatically apply. However, you must file a return for earnings over £7,500
- If you share the rental income with someone else, you each get half of the £7,500 allowance.
When you have a lodger, you are still responsible for the full council tax. You must tell your council if having them in the house means you’re no longer entitled to a single person discount.
If you have more than one lodger at a time, you may have to pay capital gains tax when you sell on the part of the house that you rented out, for the time it was let. That’s because the taxman sees that as running a lodging business, so you’ll lose some of the tax relief that applies to price gains on your main home.