Rent-a-Room Relief is a tax exemption designed for people who let out furnished accommodation in their home. If you take in a lodger, run a small bed and breakfast, or provide guest accommodation in the property where you live, this relief can significantly reduce or eliminate your tax liability on that income.
The relief offers two main benefits. If your gross income from letting furnished rooms in your home doesn't exceed £7,500 per year, you pay no tax on it at all. If your income exceeds this amount, you can choose between two different methods of calculating your tax bill, allowing you to pick whichever produces the lower tax.
What does "Your Home" Mean for this Relief?
For Rent-a-Room Relief to apply, the letting must be in your only or main residence at some point during the tax year. Your main residence is determined as a matter of fact, it's the property where you actually live for most of the time, where friends and family would expect to find you.
This doesn't need to be an owner-occupied property. If you rent your home, you can still claim Rent-a-Room Relief on income from subletting a room, though you should check whether your tenancy agreement permits this.
The term "residence" includes a building or part of a building occupied as a separate home, as well as caravans and houseboats. What matters is that you're living there as your home when you let out the accommodation.
For capital gains tax purposes, you might designate a different property as your main residence, but that doesn't affect Rent-a-Room Relief. The test here is purely factual, where do you actually live?
What types of letting qualify?
The relief applies to income from providing furnished residential accommodation in your home. This covers several common situations:
Taking in a lodger who rents a room in your house is the most typical arrangement. The lodger lives in your home alongside you, usually with access to shared facilities like the kitchen and bathroom.
Running a bed and breakfast business from your home also qualifies, provided the house where you operate the business is your main residence. Similarly, if you run a small guest house in your home, the income can benefit from Rent-a-Room Relief.
The accommodation must be furnished. If the taxpayer has any unfurnished letting in his only or main residence, then he or she is not a qualifying individual and any furnished letting the same taxpayer has in the same residence cannot attract rent-a-room relief.
What Income Counts Towards the Limit?
When calculating whether you're within the £7,500 threshold, you count all the gross receipts from letting furnished accommodation in your home during the tax year. This includes more than just the rent itself.
If you provide meals, cleaning services, laundry, or any other goods or services connected with the letting, payments for these count towards your total receipts. The fact that such payments might be covered by a separate agreement doesn't matter if the services relate to the use of the furnished accommodation, they're included.
For example, if you charge a lodger £500 per month rent plus £50 per month for breakfast and laundry services, your total monthly receipts are £550, not £500. |
Any balancing charges arising from capital allowances claimed on items used in the letting also count as receipts for Rent-a-Room purposes.
Does the Relief Apply to Office or Business Use?
No. Rent-a-Room Relief specifically applies to furnished residential accommodation used as living space. If you let a room in your home as office space or for storage, the relief doesn't apply to that income.
This distinction is important because "accommodation" in this context means living accommodation. If a room stops being used as residential space and becomes business premises, it no longer qualifies.
However, the relief does cover genuine lodgers who happen to study at home or do some business work in the evenings or weekends. A student who uses a desk in their room for studying, or a lodger who occasionally works from home, still counts as using the room residentially. The key is that the room's primary purpose is as living accommodation, not as a workplace or business premises.
What is the Exemption Limit and How Does it Work?
The basic exemption limit is £7,500 per year. This means if your total qualifying receipts for the tax year don't exceed the limit, you pay no tax on that income.
This income limit is your gross income before any expenses. If you receive £7,500 or less, you don't deduct any costs from it. So, the entire amount is simply tax-free.
The duration of the letting doesn't affect the limit. Whether you let for two weeks or the full year, the threshold remains the same. If you charged a high weekly rate but only let for a short period, you could still be within the exemption.
When is the limit reduced to £3,750? |
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The exemption limit is halved to £3,750 if someone else also receives income from letting accommodation in the same property during the same tax year. This typically happens when joint owners of a property each take in lodgers, or when two people living in the same home both let rooms. For instance, if you and your partner jointly own your home and you each let a room to different lodgers, you would each have a £3,750 limit rather than £7,500. The reduction applies when another person receives income from the same residence at any time during the tax year, even if you're not letting at exactly the same time. |
What Happens if you Move Home During the Year?
If you move from one home to another during the tax year and let rooms in both properties, you must add together all the qualifying receipts from both homes for that year. You don't get two separate £7,500 allowances.
For example, if you let a room in your old home from April to September, receiving £4,000, then move and let a room in your new home from October to March, receiving £5,000, your total receipts for the year are £9,000. This exceeds the £7,500 limit, so you wouldn't be automatically exempt. |
The property doesn't need to be your main residence throughout the entire year. What matters is that it was your main residence at some point during the period you were letting the accommodation.
What if you're Below the Exemption Limit?
If your qualifying receipts don't exceed your exemption limit (£7,500 or £3,750), you're automatically exempt from tax on that income. You don't need to tell HMRC about it or include it on a tax return.
Under this automatic exemption:
You have no taxable profit
You have no allowable loss
You cannot claim capital allowances on items provided for the letting
You don't need to register for Self Assessment if this is your only source of taxable income
This exemption applies automatically without you needing to make any claim or election. The letting could be for any duration even just a few weeks provided your total receipts for the year stay within the limit.
Can you Opt out of the Rent-a-Room Exemption?
Yes. Even if your receipts are below the exemption limit, you can choose not to use Rent-a-Room Relief. You would do this by completing a tax return showing your actual income and expenses in the normal way.
Why would you opt out of a tax exemption? The main reason is if your actual expenses exceed your income, creating a loss. If you claim Rent-a-Room Relief, you're treated as having no profit and no loss. But if you don't claim the relief, you can report the loss and potentially use it against other rental income.
You need to make a fresh decision each year. If you want to opt out, you must notify HMRC within the time limit, which is one year after the Self Assessment filing deadline for that tax year.
What Happens When Receipts Exceed the Exemption Limit?
If your qualifying receipts exceed £7,500 (or £3,750 if the limit is halved), you have a choice between two methods of calculating your taxable profit.
Method A is the default. Under this method, you calculate profit in the normal way: total receipts minus allowable expenses. This is how any other rental income would be taxed. You can claim all your actual expenses and capital allowances.
Method B is the alternative. Under this method, your taxable profit is simply your gross receipts minus £7,500 (or £3,750). You cannot claim any expenses or capital allowances.
Which method you use can make a significant difference to your tax bill.
Can you Switch Between Methods?
Yes. You can change methods each year, but you must notify HMRC within the time limit each time you switch.
If you're using Method B and your receipts drop below £7,500 (or £3,750), you become automatically exempt and Method B stops applying. If receipts increase again later, you need a fresh election to use Method B.
What if you're Making a Loss?
If your expenses exceed your income, Method B doesn't help because it would still show a profit when you've actually lost money.
Under Method A | Under Method B |
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Under Method A, you can report the loss and potentially use it against other rental income. Under Method B, you cannot claim expenses or show a loss. | If you're using Method B in a loss-making year, notify HMRC to stop using it so you can report your actual loss. Similarly, if receipts are below the exemption limit but you're making a loss, opt out of the automatic exemption to report the loss. |
Does the Relief Apply to Self-Contained Flats?
The rules around self-contained accommodation within your home are more complex.
If you've converted part of your house into a self-contained flat with its own facilities and let it out, whether Rent-a-Room Relief applies depends on whether the conversion is temporary or permanent.
A temporary division of your home can still qualify for the relief. Whether a division is temporary is determined by looking at several factors:
Would structural alterations be needed to undo the division? How long has your home been divided this way? How long do you intend the division to continue? Does the flat have its own separate entry? Is it separately metered for gas and electricity? Does it have a unique postal address? Could it be mortgaged separately?
None of these factors is decisive on its own. The question is whether, taking everything together, the division appears temporary. If the flat is permanently separate from the rest of your home, it's not part of your residence for Rent-a-Room purposes, and the relief wouldn't apply.
What if you Go Abroad or Move out Temporarily?
If you move abroad or temporarily move out of your home to live elsewhere, Rent-a-Room Relief normally stops applying from the date you stop living there, even if you intend to return.
This is because the accommodation must be part of your residence during the letting. If you're not living there, it's not your residence during that period.
However, if you were letting a room and claimed Rent-a-Room Relief while living there, then moved out during the tax year, the relief can continue to apply until the end of that tax year. But if you don't return and the letting continues into the next tax year, no relief would be available for that following year.
Note
If the letting only begins after you've already moved out, even if this happens in the same tax year, the relief doesn't apply at all because the property wasn't your residence when the letting started.
Can Companies or Partnerships Use this Relief?
No. Rent-a-Room Relief is only available to individuals. Limited companies, limited liability partnerships, and partnerships generally cannot use it.
However, if individuals jointly own a property and let rooms without forming a partnership, they can each claim the relief. For instance, if you and your partner jointly own your home and each let a room, you're both qualifying individuals. You would each have a £3,750 exemption limit (because someone else is also receiving income from the same property).
How Does the Relief Interact with Your Rental Business?
If you have other rental properties outside your home, income covered by Rent-a-Room Relief is treated separately from your other rental business. If you're automatically exempt because your receipts don't exceed £7,500, that income sits outside your rental business entirely. It's not reported on your tax return at all.
If you're using Method A and reporting actual profit from letting in your home, that profit is included in your overall rental business calculation alongside profits from any other properties you let.
If you're using Method B, your profit (gross receipts minus £7,500) is similarly included in your overall rental business.
Any loss from your home letting can potentially be offset against profits from other rental properties, but only if you're using Method A or have opted out of the automatic exemption. Under Method B, you cannot show a loss.
What Records should you Keep?
Even if you're automatically exempt from tax, keeping basic records is sensible. You should retain evidence of your rental income and the dates you received it. This helps you demonstrate that you remained within the exemption limit if HMRC ever enquires.
If you're using Method A, keep full records of both income and expenses, just as you would for any rental business. You'll need these to calculate your actual profit.
If you're using Method B, you still need records of your gross income, even though you're not claiming expenses. The relief requires you to prove the amount of receipts you received.
Keep records of when the accommodation was let, who occupied it, and the amounts received. If you provide services like meals or cleaning, keep records of payments for these too.
Should you use Rent-a-Room Relief?
For most people letting a room in their home, Rent-a-Room Relief provides a significant tax advantage. If your receipts are below £7,500, the automatic exemption removes all tax liability with no paperwork required.
If your receipts exceed £7,500, the choice between Method A and Method B depends on your specific circumstances. Calculate your position under both methods to see which produces the lower tax bill. If your expenses are high, Method A usually works better. If your expenses are low, Method B typically saves more tax.
The main situation where you wouldn't use the relief is when you're making a loss and want to use that loss against other income. In that case, opting out of the relief allows you to report your actual financial position.
Remember that you're not locked into a single approach. You can review your position each year and make a fresh decision about which method works best for you.
