New test introduced for Rent-A-Room relief

Rent-a-room relief was introduced in 1992 to provide an incentive for people to rent out spare rooms in their homes. The aim was to free up more low-cost rental accommodation and enable workers to move around the country without incurring massive hotel bills for medium to long term stays.

Since its introduction, there have been significant changes to the housing market, including the growth of platforms such as 'Airbnb' which has made letting a lot easier for landlords and tenants alike.

In the Spring Budget of 2017, the government announced that it 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 to determine whether the relief was being used primarily for residential purposes or as holiday/guest accommodation. Views were sought as to whether relief should be restricted to those letting for residential purposes and whether relief should be restricted only to lets exceeding 30 days.

The nature of the current relief is such that an individual can earn up to £7,500 tax-free per annum, from letting furnished accommodation in their main or only residence and it is not a requirement that the individual letting owns the property. The relief is also available to those running 'bed-and-breakfasts' or a 'guest house'. When more than one person benefits, the tax-free limit is halved to a minimum of £3,750 (so four people benefiting still get £3,750 each).

If the rental income received exceeds the respective threshold, the taxpayer has two choices: either to compute profits in the normal way or to be taxed only on the rental income received in excess of the limit. For example, Jack lets out two rooms to lodgers in 18/19 receiving £10,000, incurring £2,000 in expenses. If he claims rent-a-room relief he is taxed only on £2,500, yet if he uses the usual method he is taxed £8,000, so in this case clearly rent-a-room relief is best in Jack's case.

Since April 6 2019 there were changes to rent-a-room relief which will be applied via the new 'shared occupancy test'. The significance of this new test is that the taxpayer (or a member of his/her family or household) must be living in the residence and physically present for at least some part of the rental period to qualify for the relief. No minimum period of 'overlap' has been specified in the draft legislation so it appears that one night in the same house with your lodger/tenant is enough!

Clearly the above changes will be OK in the case of long term lodgers but may prove very difficult to manage in the case of weekend/weekly lets, such as in the case of 'Airbnb type' arrangements. The result may bring persons who would otherwise have enjoyed the generous rent-a-room tax free limit into a taxable situation... not all is lost, though, as they still have the £1,000 tax free property allowance to enjoy!

This column is sponsored by Norwich Accountancy Services.