Tax breaks for renting a room

Rent-a-room relief

Rent-a-room relief (RARR) was introduced in the 1990s to simplify the tax reporting requirements (and reduce HMRC’s admin) for individuals who let part of their home. It achieves this by exempting rental income up to a limit (£7,500 for 2024/25). Where income exceeds the limit there’s no automatic exemption but the £7,500 can instead be claimed as a deduction from the rent received instead of the actual costs of letting.

Example - part 1. Joan owns and lives in a three-bedroom property in a university town. She takes in two students as lodgers. Each has exclusive use of one bedroom and use of the kitchen and living areas of the property. Joan charges each lodger £400 per month (£9,600 per year). This exceeds the RARR limit and therefore the income is not exempt. However, rather than fuss with calculating the proportion of expenses, which Joan reckons would only amount to around £2,500, she can elect to deduct the RARR amount of £7,500 so that she only has to pay tax on £2,100.

Exempt income

For one year Joan only takes in one lodger so she can renovate the other room and make general repairs to the shared areas. As a result, her expenses exceed rent meaning she’s made a loss. The trouble is, as the rent fell below the RARR limit it’s automatically exempt from tax and the loss is ignored for tax purposes. If the exemption did not apply Joan could use the loss to reduce tax on the rent for later years, say when she has two lodgers again.

You can disapply RARR so that a loss will not be lost because of the exemption. This requires a special election which stays in force until you revoke it.

Example - part 2. Joan made the election to prevent the RARR exemption applying for the year of the loss, which amounts to £3,000. The following year Joan takes in two lodgers, again at £400 per month. Her income is back to £9,600 and her expenses are £2,500. She therefore revokes her claim for RARR not to apply so that she can claim the £7,500 as a tax deduction. This leaves £2,100 taxable. The good news is Joan can use the loss of £3,000 to reduce the taxable amount to nil and carry forward the remaining £900 of loss to reduce the taxable amount for the next year or, if it’s not needed, later years.

Key points

Part 2 of our example shows that:

• the tax loss is only achieved by Joan making the election to disapply RARR for the year
• to benefit from the tax deduction in the following year Joan must revoke the election and claim the RARR amount as a deduction in place of her actual letting costs
• the loss can be used to reduce the taxable amount for a later year even where the RARR amount is claimed as a deduction; and
• none of the loss is used in a year where the rent is exempt because it’s less than the RARR amount. For example, had Joan not taken on a second lodger the year following the renovation, her rental income would have been £4,800 and so exempt. The loss would not be needed and would be saved for use against profits of a later year.