Rent-A-Room Relief – A New Test

Sarah Bradford explores the new test that will need to be met from 2019/20 onwards in order to qualify for rent-a-room relief.

Rent-a-room relief was introduced in 1992 to provide an incentive for people to let out spare rooms in their home; the aim being to increase the availability of low-cost rented accommodation and make it easier for people to move around the country for work. 

Since its introduction, there have significant changes to the housing market. In addition, the growth of online platforms such as ‘Airbnb’ have made it easy for those with accommodation available for letting to reach potential occupants and has opened up the holiday lettings market. 

At the time of the Spring Budget 2017, the government announced that they would be reviewing rent-a-room relief to ascertain whether it continued to provide the right incentives to encourage longer-term lettings. A call for evidence was announced at the time of the Autumn Budget 2017. The call for evidence, which ran from 1 December 2017 to 23 February 2018, sought to:

One of the main purposes of the call for evidence was to find out whether use of the relief generally was by individuals letting out rooms for residential purposes, or as holiday/guest accommodation. Views were also sought on whether the relief should be restricted to those letting for residential purposes, and whether the relief should (say) be restricted to lets offered on a longer-term basis (e.g. 31 days or more).

A summary of responses to the call for evidence was published on 5 July 2018.

Rent-a-room relief allows an individual to earn up to £7,500 per tax year from letting furnished accommodation in their main or only residence. An individual does not need to own the property to benefit; the relief is also available to those taking in a lodger in a home that they rent (although the ability to do this will depend on the nature of their rental agreement and whether sub-letting is permitted). It is also available to those running a bed-and-breakfast or guest house.

Where more than one person benefits from the rental income, the tax-free limit is halved to £3,750. The limit is £3,750 per person regardless of how many other people receive a share of the rental income.

Where rental income from letting furnished accommodation in the individual’s home is less than the tax-free threshold, the relief applies automatically; it does not have to be claimed and the rental income does not need to be reported to HMRC.

Where the rental income exceeds the threshold, the individual must complete a self-assessment tax return. They have a choice whether to compute profits in the usual way (i.e. rental income less allowable expenses) or whether to simply deduct the £7,500 (or £3,750 as appropriate) allowance from rental income. The best option will depend on whether expenses are more or less than the rent-a-room allowance – if they are more, the normal rules will be more beneficial; if they are less, rent-a-room will provide a more favourable result. It should be remembered that in most cases, landlords will compute profits using the cash basis unless an election to use the accruals basis is in place.

David lets out two rooms in his house to lodgers and receives rental income of £10,000 in 2018/19. His expenses are £2,000. 

By claiming rent-a-room relief, he is taxed only on the rental income in excess of £7,500 (i.e. £2,500), rather than the rental profit of £8,000 that would be taxable under the normal rules. It is clearly beneficial for David to claim rent-a-room relief.

Goliath also lets out two rooms in his home and receives rental income of £10,000 in 2018/19. However, he also incurs expenses of £8,000. 

In this case, it is better for Goliath not to claim rent-a-room relief. Calculating profits using the normal rules gives rise to a taxable profit of £2,000 (i.e. £10,000 - £8,000), whereas under rent-a-room, the profit would be slightly higher at £2,500 (i.e. £10,000 - £7,500). 

Even where the relief applies automatically, it will not always deliver the best result. If computing profits in the normal way would result in a loss, the benefit of that loss would be lost under rent-a-room. 

Instead, the income and expenses should be returned on the self-assessment tax return in order to preserve the loss. 

The eligibility criteria for rent-a-room relief do not set any conditions on the length of the letting, nor on the type of the let – all that is required to qualify is that the individual lets furnished accommodation in their only or main residence. Taking in a long-term lodger and providing numerous short lets to holidaymakers or those on business via sites such as Airbnb qualify equally. 

Responses to the call of evidence did not provide any evidence to suggest that the length or type of tenancy was an appropriate proxy for achieving the stated objective of increasing the supply of low-cost residential accommodation. Consequently, as long as the eligibility conditions are met, the relief will remain available to all lets, however short.

In publishing the responses to the call for evidence, the government announced that they would be retaining the rent-a-room threshold at its current level of £7,500 a year, as this exceeded the average cost of renting a room in the UK by more than £1,000. However, they also noted that there was an opportunity to clarify the purpose of rent-a-room relief to ensure that it was better targeted to meet the stated aim of providing an incentive for those with spare rooms to take in a lodger and that they would be introducing a new ‘shared occupancy’ test.

The proposed new shared occupancy test will apply from 6 April 2019 and will require the taxpayer (or a member of his family or household) to be living in the residence and physically present for at least some part of the rental period for rent-a-room relief to be available.

The legislation to provide for the test has been published in draft for comment before its inclusion in the Finance Bill 2018-19, together with an explanatory note. The government has also published a policy paper explaining the nature of the reform. Comments on the draft legislation were sought by 31 August 2018.

More specifically, the shared occupancy (or non-exclusive residence) test requires that the use to which the rent-a-room receipts relate is the physical use of the furnished accommodation that overlaps in time (whether wholly or partly) with the use of the residence as sleeping accommodation by an individual or a member of the individual’s household. However, it is further stipulated that a tenant is not a member of the taxpayer’s household for these purposes (so a period of overlap by another tenant does not meet the test).

The draft legislation does not specify a minimum period of overlap – thus an overlap of one night would meet the test. However, the test must be met for each let, so if the landlord lets a room through Airbnb every weekend, he would need to be there for at least one night of each let for the income from that let to qualify for rent-a-room relief. However, in a let for a longer period, the requirement is still met if the landlord is only there for one night, even if he or she is absent from the remainder of the letting period.

The Brown family and the White family both live near Ascot and take advantage of the opportunity to earn some rental income during Royal Ascot.

The Brown family let out their home for a week and spend the week at their villa in the South or France. The White family also let out their home during Ascot week but spend two nights in their home while the tenants are there, before joining the Brown family in France.

From 2018/19, the Brown family will no longer be able to claim rent-a-room relief in respect of the letting income during Royal Ascot, as there is no overlap period; however, the White family meet the shared occupancy test and are eligible for rent-a-room relief.

Where rent-a-room relief is not available as a result of the shared occupancy test not being met, it should be remembered that there is an exemption for the first £1,000 of property income, to which the new test does not apply.

When letting accommodation in your home from 6 April 2019 onwards, make sure that there is a period of overlap where you are also in the property to preserve rent-a-room relief.