Income from renting a room

[NDA]

A friend, who has no income, is considering renting a room - £1k a month.

I had assumed (I think wrongly) that if the rental income was below their personal allowance (which is around £12.5k) that the rental income would be tax free as there's no other income.

However it seems that it's not so simple!

Firstly there's the Rent A Room Scheme in which the first £7.5k tax free - and then I assume tax is paid on any rental income over this.

If not opting in to the above scheme, under the 'Property Allowance' only the first £1k of rental income is tax free. I am not sure if you can claim the remainder under the personal allowance.

I'm confused!

Anyone know? I've done a bit of reading, but it's not particularly clear.

[Eric Mc]

The rent a room scheme only applies to those who rent a room in their house for under £7,500 per annum, If your gross rents exceed £7,500 you cannot use it.
Instead, you must prepare a rental income and expenditure account showing the gross rental income less allowable costs. If your friend is renting out a room in his house for £12,000 per year, he cannot use the Rent a Room Scene. Instead he needs to submit a self assessment tax return showing his net rental income. If he had no other income he will have no tax liability arising - but he will need to complete and submit a tax return each year.

[Pit Pony]

Eric Mc said:

The rent a room scheme only applies to those who rent a room in their house for under £7,500 per annum, If your gross rents exceed £7,500 you cannot use it.
Instead, you must prepare a rental income and expenditure account showing the gross rental income less allowable costs. If your friend is renting out a room in his house for £12,000 per year, he cannot use the Rent a Room Scene. Instead he needs to submit a self assessment tax return showing his net rental income. If he had no other income he will have no tax liability arising - but he will need to complete and submit a tax return each year.

All this is true. If you have a mortgage, you may have to request permission (which they will usually give) in writing. I did this with virgin money before I advertised and they sent back a letter telling I needed to tell them the name of the lodger and provide ID and sent them a copy of the signed lodger agreement. Something that you can't do before advertising. So once I'd found my lodger, got a copy of his ID, got the agreement signed and emailed it to virgin Money requesting permission.
Then he moved in and 3 weeks later they sent an email declining permission. They stupidly thought my lodger agreement was an AST. When they eventually read it, they sent me a letter giving me permission. He'd been there a month.
Eventually it turned out he was an alcoholic and couldn't hold down a job for 5 mins. But hey. I had £5k in rent before he moved out.

[NDA]

Very helpful - thanks.

[croyde]

Can't you just say they are a flatmate and any money is helping with costs?

[Strudul]

Eric Mc said:

The rent a room scheme only applies to those who rent a room in their house for under £7,500 per annum, If your gross rents exceed £7,500 you cannot use it.
Instead, you must prepare a rental income and expenditure account showing the gross rental income less allowable costs. If your friend is renting out a room in his house for £12,000 per year, he cannot use the Rent a Room Scene. Instead he needs to submit a self assessment tax return showing his net rental income. If he had no other income he will have no tax liability arising - but he will need to complete and submit a tax return each year.

Incorrect.

The £7.5k is an allowance. You can still use the scheme if rental income exceeds £7.5k, you would just pay tax on anything earnt over that.

[NDA]

Strudul said:

Incorrect.

The £7.5k is an allowance. You can still use the scheme if rental income exceeds £7.5k, you would just pay tax on anything earnt over that.

That was my reading of it too - but it's not particularly clear.

I had assumed that because the total rental income would be below the personal allowance, then it would all be tax free. But I don't get the 'property allowance' limit of £1k.

[Strudul]

NDA said:

That was my reading of it too - but it's not particularly clear.

I had assumed that because the total rental income would be below the personal allowance, then it would all be tax free. But I don't get the 'property allowance' limit of £1k.

You could earn a max of £20070 (£12570 personal allowance + £7500 rent-a-room scheme) before paying any tax (assuming no other income / benefits).

The £1k property allowance can not be used in conjunction with the rent-a-room scheme.

[Eric Mc]

Strudul said:

Incorrect.

The £7.5k is an allowance. You can still use the scheme if rental income exceeds £7.5k, you would just pay tax on anything earnt over that.

This is what HMRC says. They say "You can then opt into the scheme and claim your tax-free allowance".

What "tax free allowance" are they talking about - your "normal" allowance of £12,570 or the "rent a room" allowance?

As per HMRC website -

How it works

The tax exemption is automatic if you earn less than £7,500. This means you do not need to do anything.

If you earn more than this you must complete a tax return

You can then opt into the scheme and claim your tax-free allowance. You do this on your tax return.

You can choose not to opt into the scheme and instead record your income and expenses on the property pages of your tax return.

[NDA]

nuyorican said:

A grand a month for a room? Wow. Who are they renting it to, the king of Saudi Arabia?

It's not in Birkenhead.

[Portia5]

nuyorican said:

A grand a month for a room? Wow. Who are they renting it to, the king of Saudi Arabia?

It also (probably) includes use of a bathroom, use of a kitchen, and the room-renter isn't likely to be paying utility bills or CT either. So in a right nice house in a good area a grand isn't THAT dear.

[croyde]

Normal price here in outer London.

[Eric Mc]

Yep - I might be exploring this option in a few months and £1,000 for a room is not out of the ball park.

[Portia5]

nuyorican said:

Crikey. You learn something new every day. Cheers.

'There but for the grace of god go I', but if I were ever in that position I think I'd rather live in a camper van. Gym membership for showers, and spend the remainder of my grand a month on coke and hookers

Given the cost of the van hire and ground rent these days, the only coke and hookers you'd be enjoying would be out of a red tin plus a behind-the-rugby-club fumble with a gay front row forward.

[98elise]

Portia5 said:

nuyorican said:

A grand a month for a room? Wow. Who are they renting it to, the king of Saudi Arabia?

It also (probably) includes use of a bathroom, use of a kitchen, and the room-renter isn't likely to be paying utility bills or CT either. So in a right nice house in a good area a grand isn't THAT dear.

Agreed. You're not going to be confined to a single room, and it's an all one cost. For a nice place £1000 doesn't sound extreme.

[NDA]

It’s a bedroom, plus their own garden room (with terrace), share of kitchen… bathrooms etc. Private parking. No additional bills. Expensive location… it’s actually quite cheap in comparison with anything else in the area.

[Countdown]

Strudul said:

NDA said:

That was my reading of it too - but it's not particularly clear.

I had assumed that because the total rental income would be below the personal allowance, then it would all be tax free. But I don't get the 'property allowance' limit of £1k.

You could earn a max of £20070 (£12570 personal allowance + £7500 rent-a-room scheme) before paying any tax (assuming no other income / benefits).

You could earn £20k without paying tax but not ALL from renting out a room. So, if the OP was charging £400 per week rent (c£20k per annum) and had no other income he could use his personal allowance and then pay tax @20% on everything above £12,570.

AIUI you can't combine both the personal allowance AND the RAR allowance to create a £20k tax free allowance.

[Countdown]

98elise said:

Portia5 said:

nuyorican said:

A grand a month for a room? Wow. Who are they renting it to, the king of Saudi Arabia?

It also (probably) includes use of a bathroom, use of a kitchen, and the room-renter isn't likely to be paying utility bills or CT either. So in a right nice house in a good area a grand isn't THAT dear.

Agreed. You're not going to be confined to a single room, and it's an all one cost. For a nice place £1000 doesn't sound extreme.

Ditto.

My youngest pays £900pcm plus bills for a place in Fitzrovia (shared with 3 others). My nephew pays £1200 for a room in Hackney

[ziontrain]

Countdown said:

You could earn £20k without paying tax but not ALL from renting out a room. So, if the OP was charging £400 per week rent (c£20k per annum) and had no other income he could use his personal allowance and then pay tax @20% on everything above £12,570.

AIUI you can't combine both the personal allowance AND the RAR allowance to create a £20k tax free allowance.

You absolutely could have £20k rental income and not pay tax on it. Taxable rental profits = £20k-£7.5k=£12.5k

First £12,570 of profits covered by personal allowance = £0 tax.

[NDA]

ziontrain said:

Countdown said:

You could earn £20k without paying tax but not ALL from renting out a room. So, if the OP was charging £400 per week rent (c£20k per annum) and had no other income he could use his personal allowance and then pay tax @20% on everything above £12,570.

AIUI you can't combine both the personal allowance AND the RAR allowance to create a £20k tax free allowance.

You absolutely could have £20k rental income and not pay tax on it. Taxable rental profits = £20k-£7.5k=£12.5k

First £12,570 of profits covered by personal allowance = £0 tax.

Sounds good if correct. It sounds right!

Thanks.