You’re about to be posted to another part of the country for an extended period. You’re going to let your home to a friend while you’re away. Will you be entitled to claim rent-a-room relief against the rent you receive?
HMRC’s simplified method for working out taxable profits from letting part of your home has been around since the 1990s. It allows you to receive up to £7,500 per year tax free. The rules have barely changed, which is often a sign of good legislation, however there are a few tricky aspects to rent-a-room relief which frequently cause trouble.
Christopher, an employee who lives alone, has been asked by his company to oversee the integration of a new branch. The work might last up to a year. Rather than leave his home empty, he’s asked a friend’s son to move in as a lodger. They’ve agreed a rent of £450 per month to cover everything except food and groceries.
Relief or no relief?
If Christopher is entitled to rent-a-room relief the rent will be tax free. The trouble is rent-a-room relief is only allowed if the letting income is from your “only or main residence”. During his time working away he will live in rented accommodation paid for by his employer while his current home produces the rental income.
Trap. Unlike the capital gains tax relief for “only or main residences”, the rent-a-room relief rules don’t allow you to nominate which of two residences count as your main one.
Home and away
Whether a property is your only residence is a simple question to answer, but whether it’s your main residence is far trickier. HMRC rightly says it depends on facts: how well established are you in the property; are you putting down roots or just biding time until you return to your main home? The amount of time spent in a residence isn’t necessarily an indicator, but it can be a factor if occupation lasts a long time. In this case the facts favour Christopher’s current home remaining his main residence despite his long absence.
Main residence and basis periods
Even if HMRC successfully argued that Christopher’s temporary accommodation was his main residence, he may still be entitled to the relief. A property only needs to be a main residence at any time during the “basis period” for the letting income to qualify. The basis period starts at the beginning of the tax year or, if later, when the letting starts, and ends on the last day of the tax year or, if earlier, when the letting income stops. This provides an easy way for Christopher to guarantee relief.
Tip 1. By allowing the lodger to move in before he moves to the temporary property he can ensure rent-a-room relief applies for that tax year. Equally, the relief will be available for the tax year in which he returns to the property as long as he moves back in while the lodger is still living there.
Tip 2. Renting a room for short periods, say where you vacate the property to let it via Airbnb or a similar arrangement, will usually qualify for the relief. You don’t normally need to overlap occupation with your guests because the property will remain your main residence even though you’re absent.
By: FL Memo