Rent-a-room relief automatically exempts income from letting part of your home, even where you would be better off if it didn’t apply. When and how can you elect to disapply the relief?
Rent-a-room relief
You’re probably aware that usually income from letting part of your home automatically falls within the rent-a-room scheme where the accommodation is furnished. What you might not know, because HMRC’s guidance is misleading, is that where you run a B&B or guest house, which counts as a trade rather than a property rental business, it’s potentially also within the scheme.
Trap. If you run a B&B or guest house and your income before expenses for a year is less than £7,500, it’s covered by rent-a-room relief and so is tax exempt. Surprisingly, this could increase your tax bill.
Example. Andrea runs a B&B, letting two rooms in her house. 2020/21 is a poor year and she only receives income of £3,000. Her expenses (including capital allowances and a proportion of mortgage interest, which isn’t restricted under the new rules for residential lets because the B&B counts as a trade), are £4,000. This means Andrea makes a loss of £1,000. She could use the loss to reduce tax payable on her other income, but because rent-a-room automatically applies, the income and expenses are ignored for tax purposes meaning she can’t claim tax relief for the loss.
Tip 1. You can elect for rent-a-room relief not to apply for a year. It’s usually worth opting out of rent-a-room where you make a loss from your letting business.
Tip 2. An opt-out election isn’t permanent. You can use another election to revert to the rent-a-room scheme whenever you want to.
Calculating losses (or profits)
Where you elect for rent-a-room relief not to apply, you’ll need to provide details of your income and expenses to HMRC on your tax return. Your loss (or profit) is worked out in the normal way, that is, income less expenses. In our example Andrea can claim tax relief for her £1,000 loss by claiming a refund of tax she paid on other income for the same tax year or the one before. Alternatively, she could use the loss against the profit from her B&B for a later year for which rent-a-room didn’t apply.
Greater income
There’s one situation where you might want the rent-a-room relief deduction even though your income for the year isn’t covered by the scheme (because it’s greater than £7,500). The good news is that there’s a second type of rent-a-room election you can use to achieve this.
Example. In 2021/22 Andrea receives B&B income of £9,000 and has expenses of £6,000. Because rent-a-room doesn’t apply she would normally have to pay tax on her profit of £3,000. However, Andrea can elect to work it out using the rent-a-room relief deduction instead of her expenses. This will reduce her taxable profit to £1,500, i.e. £9,000 – £7,500.
Tip. The election can be used whether your letting counts as a trade or just a rental business. Plus, like the other election you can withdraw for any year for which you don’t want it to apply.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.