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Do you have a guest bedroom? Everything you need to know about the Room Rent Scheme

If you’re lucky enough to have a spare bedroom, don’t mind companionship, and need some extra cash, you could earn around £ 590 a month by taking in a renter.

The latest SpareRoom UK Rental Index shows that the average UK room rental price is now £ 590 per month, although a room in London can be rented for a substantial £ 725.

And because the government allows you to earn up to £ 7,500 a year tax-free from a renter through the Rent a Room scheme – it can be a financial lifeline for many.

You don’t even have to be the owner of the property to take advantage of this, but you do need to get permission from your landlord.

Average UK room rental costs £ 590pm according to the SpareRoom UK Rental Index

Average UK room rental costs £ 590pm according to the SpareRoom UK Rental Index

Matt Hutchinson, Managing Director of SpareRoom, said: “After the latest economic crisis, we saw homeowners taking over tenants as a way to help them financially, and we expect this to happen again in the coming months and even years.

Incorporating a tenant can be a great way to make some extra money – and the government’s Rent a Room scheme, something SpareRoom campaigned for six years to get the tax-free threshold up to its current level, is a great incentive for home owners. ‘

This is Money takes a look at the ins and outs of the scheme and the practicalities of renting out your guest room so that you are in the best possible position to take advantage of the rewards on offer.

What is the Rent a room scheme?

The government’s Rent a Room scheme is open to anyone who has a guest room in the house in which he lives and wants to rent it out to a tenant.

A tenant is someone who rents a room in your home without having exclusive rights to another part of the property, although they typically share common living areas such as the kitchen and bathroom.

The scheme allows you to earn tax-free income of up to £ 7,500 a year, or £ 3,750 each if you rent out with someone else.

If you earn more than the threshold, you must complete a tax return and choose to join the scheme to claim your tax-free assets.

You can also opt out – meaning you won’t get a tax credit of £ 7,500, but you can declare some expenses that may work out better for you.

According to SpareRoom, the average UK room rental amount between April and June 2020 was £ 590, two percent less than the same period in 2019

According to SpareRoom, the average UK room rental amount between April and June 2020 was £ 590, two percent less than the same period in 2019

According to SpareRoom, the average UK room rental amount between April and June 2020 was £ 590, two percent less than the same period in 2019

What you need to know before getting a tenant

Most homeowners and council tenants can take in a tenant, provided they have a spare room and can use common areas and amenities.

Generally, it is easier to evict a tenant than a tenant, but you must give them ‘within a reasonable time’ and it is recommended that you get a tenant agreement that is discussed, agreed and signed in advance .

Unlike landlords who have tenants, someone who takes a tenant into their home does not yet have to comply with rental guarantee laws.

You will need to perform a ‘right to rent’ check to see if the tenant is legally allowed to reside in the UK. You must make and keep copies of it relevant documents and write down the date on which you made the check.

Nowadays it is relatively easy to find a tenant with websites such as Spareroom, Roomgo and Gumtree.

Do you have to register or deregister for the scheme?

Incorporating a tenant doesn’t mean you have to sign up for the scheme, which may be more tax-efficient in the long run. It depends on what other income you earn and on your other financial affairs.

As a general rule of thumb, if your expenses are £ 7,500 or more, you better forgo the Rent a Room scheme.

A tax accountant is best placed to help you figure out how best to structure your finances for these purposes.

However, if your rental income is £ 7,500 or more, you generally have two options:

1. Sign out: Pay tax on your actual profit from the property (which is calculated as income received minus allowable expenses)

2. Sign Up: Pay tax on gross (pre-tax) income less the tax-free threshold of £ 7,500, but without reimbursement for expenses

For example, if you were charging a tenant £ 600 a month in rent and £ 150 a month in bills, the total income for a full 12 months would be £ 9,000 (£ 7,200 rent plus £ 1,800 bills or expenses).

Permitted Expenses

Broker Fees

Legal costs for renting a year or less, or for extending a lease for less than 50 years

Accountant fees

Home and contents insurance

Interest on real estate loans

Maintenance and repairs (but no improvements)

Energy bills

Rent, canon, service costs

municipal taxes

Services you pay for, such as cleaning

Direct costs of renting out the property, such as telephone calls, stationery and advertising

With option one, at a basic income tax rate, you pay just 20 percent tax on the rent, which is £ 1,440. You can claim tax relief on all expenses as long as you submit your receipts along with your tax return.

With option two, as the payer of the basic income tax, you pay 20 percent of the whole amount, minus the £ 7,500. In this case, you will be taxed on £ 1,500 and only pay £ 300.

As a general rule of thumb, if your expenses are £ 7,500 or more, you should opt out of the scheme (option one).

Keep track of your receipts as your expenses can exceed £ 7,500 each year, meaning you’d better forgo the scheme.

You can switch on and off from year to year, but must do so within the specified time limit and you must notify HMRC. The current term is five days less than 22 months from the end of the tax year.

Checklist for renting out rooms

Before taking in a tenant, you should complete the following necessary checks, although these will not affect your ability to join or opt out of the Rent a Room schedule.

If you have a mortgage on your property, you should check with your lender if you can rent out a room under the terms of the mortgage contract.

You should also check whether this is allowed according to the conditions of your home contents insurer, as this can affect the cover and / or premium.

You don’t have to be a home owner to take advantage of the scheme, but if you rent out a room to a tenant while you’re a tenant, make sure your own lease allows it and that your landlord is aware of and comfortable with it .

If you live alone and therefore benefit from the 25 percent discount on the single tax, you will no longer be eligible for the discount if you decide to rent out your guest room. Make sure to notify your municipality.

If you are receiving means-tested benefits, please contact the appropriate authorities to inform them of your changed income.

You must also undergo an annual gas safety check, and furniture and furnishings must meet safety standards. It’s also a good idea (although not essential) to get electrical equipment PAT tested.

What if I still have a spare room?

If you’re even more lucky and have more than one guest bedroom, then you can have more than one tenant. This would of course mean more income and also pay more taxes.

Keep an eye on your income and make sure you take the necessary steps to declare it and pay any taxes if it exceeds £ 7,500 in any tax year.

Keep in mind that more than two tenants of your home will be creating a Multi-occupancy Home (HMO), and it must meet a variety of additional health and safety requirements.

The renting a room scheme also applies if your rental activity amounts to an exchange, for example a guest house via Airbnb, or if you run a bed & breakfast.

For more information, visit it official government website.

When do you have to file your tax return?

If your income from renting out your guest room to a tenant does not exceed £ 7,500 within the tax year, you do not need to file a tax return.

You must, however, declare the income if you are already filing a tax return, for example if you are self-employed.

If you must file a tax return, you must do so for the relevant tax year before July of the following tax year.

For example, income and tax relief must be declared no later than July 2021 for the 2020/2021 tax year.

It can be done as early as April, when the new tax year begins.

You must notify HMRC within one year of January 31 following the end of the tax year if you:

  • Would you like to stop using the scheme if your receipts are less than £ 7,500, for example, or £ 3,750 if you want to claim losses
  • Do you want to start or stop paying tax on your gross income above the rental limit?

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