The trading allowance exempts the first £1,000 of trading income per annum and would cover, for example, selling strawberries or bottled water from outside your home.
The second allowance covers the first £1,000 of rental income, which would include income from letting out parking spaces or driveways to eager watchers. For those individuals renting out rooms in their own homes, the income can be tax free provided it doesn’t exceed certain thresholds.
Shah added: “Many people could be on to a real winner as renting their house along a prime spot to catch the married couple could pay the mortgage for the whole year. For example, some properties were marketed for rent at £2,000 – £3,000 per night across the Royal Wedding weekend. However, this income may need to be declared to HMRC.”
“The ‘Rent-a-Room’ scheme generally applies to owner-occupiers and tenants who receive rent from letting furnished accommodation in their only or main home but can also be claimed by those running bed and breakfasts or guesthouses. The relief is separate to the rental income allowance and the two cannot be used together.”
Nimesh said that gross receipts of up to £7,500 may be earned before tax is due. This limit applies to a tax year and whilst it can be reduced to £3,750 if the property is owned jointly, it is not reduced according to the letting period. Under the scheme, expenses cannot be deducted from the gross income and any excess income above the £7,500 is taxable.
He added: “The alternative method available to taxpayers is to tax all rental income and claim deductions for expenses. For those individuals who are already registered for Self-assessment, any rental income must be reported on their annual Tax Return regardless of whether the ‘Rent-a-Room’ scheme applies and the appropriate box should be ticked. For those not already in Self-assessment and whose rents are below the relief threshold, the exemption applies automatically and it is not necessary to register.”
Last opportunity to use Rent-a-Room relief
As HMRC have announced an intention to review the Rent-a-Room relief to ensure it is “more aligned with long term letting arrangements”, cashing in during the Royal Wedding may be one of the last opportunities for such short term lets to benefit from the relief.
Points to be aware of:
- Be clear on the difference between “trading” and rental income. Any income received by virtue of letting property or land is taxed as rental income.
- Each individual has a personal allowance of £11,850, which is available to be offset against all taxable income. An additional £1,000 allowance should be available to offset against trading income and a further £1,000 allowance should be available to offset against ad hoc rental income.
- For those renting out a room in their main residence, the first £7,500 of rental income is exempt under Rent a Room relief.
- Taxpayers should be aware that once these allowances are exceeded, the income may need to be reported to HMRC as the penalties for failing to do so can be significant. For those taxpayers not in Self-assessment the deadline to register is 6 months after the end of the relevant tax year (by 5 October 2019 for income earned in the 2018/19 tax year). The penalties for submitting a late tax return start at £100, rising to £1,000 plus 5% of any tax due depending on the date of submission.
- Interest will be charged on late payments of tax and late payment penalties may also be charged of up to 10% of the tax due.
“The message for international clients is the same,” adds Shah. “If there is UK liability individuals must be vigilant and declare.”
