Rent-a-Room

If the property income you have is from lodgers, there is a special scheme you may choose to use. It is called the Rent-a-Room scheme. To qualify you must have one or more lodgers living in your home. By a lodger, HMRC means someone who is living with you as a member of your household, but paying you to do so.

If your ‘lodger’ has a separate front door, kitchen and other facilities, then this would not qualify for the Rent-a-Room scheme.

Under the Rent-a-room scheme, you don’t need to keep records of your expenses and you may not need to fill in tax returns – this is the case if you don’t normally receive a tax return and your receipts are below the tax-free thresholds for the scheme. The tax exemption is automatic so you don’t need to do anything. But if your receipts are above the threshold, or you do not want to use the scheme, you must do a return and you can register using form SA1:http://www.hmrc.gov.uk/sa/forms/sa1.pdf 

You are given a flat ‘deduction’ of £4,250 per year against your rental income. This means that if your lodger pays you no more than £4,250 in a year, you have no taxable rental income.

If your lodger pays you more than £4,250 then you may still use the Rent-a-Room scheme if you like, but instead of deducting the actual expenses you have made in connection with your lodger, you simply deduct £4,250 from your income. If you have high costs, such as a large mortgage, you may find that the actual expenses which relate to the lodger – including a proportion of your mortgage interest – are more than £4,250, so you would pay less tax using the standard rules for a property business as described in the sections on income and expenses above.

For more details on the Rent-a-Room scheme see http://www.hmrc.gov.uk/manuals/pimmanual/pim4001.htm

Rent-a-Room for a small B&B

If you run a B&B, you would normally be treated as trading. This would mean that you would need to register as self-employed, pay class 2 National Insurance and send in annual tax returns. But if you run a B&B from home on a small scale, you may use the Rent-a-Room scheme. This means that if your B&B income is under £4,250, you would be treated as not having made any profit at all. One possible disadvantage here is that if your expenses are more than your income, you would not be able to claim tax relief for any business losses if you use Rent-a-Room.

If you use the Rent-a-Room scheme for income from a B&B then you would include income for meals as well as the room rent. There is a special HMRC guide called Rent-a-Room for traders for B&Bs who want to use the scheme available for download from: http://search2.hmrc.gov.uk/kbroker/hmrc/forms/viewform.jsp?formId=3062.