Q. Over the coming few months we are going to have to engage a number of short term staff who are coming from outside our geographical area to perform extra work under a new contract we have secured and will require temporary accommodation. A member of our current team has told me that our current employees could rent a room in their homes to these temporary workers and the rents received by them would be tax free. Is this true and if so what if any procedures would those members of staff offering a room, have to go through to meet current tax legislation?
A. Yes your colleague is correct and this would indeed be possible. Under H M Revenue & Customs (HMRC) “Rent a Room” scheme it is possible to rent a room within your main home and gross reciepts upto £4250 per year (£2125 per year if the income is shared) is exempt from tax.
Of course rules and conditions apply and you need to be careful to ensure you will qualify under the scheme.
Rent-a-room applies to income from providing furnished residential accommodation in the taxpayer’s only or main home. For the purposes of the rent-a-room scheme, gross receipts include not only rents but also payments made to the landlord for the provision of any other goods or services (such as meals, cleaning, laundry etc) in connection with the letting.
The landlord does not have to be a home owner and even those who rent property themselves can qualify under the scheme. It is essential however to carry out a review of the lease or tenancy agreement to ensure it allows subletting. To qualify however you need to be resident in the property at that the time the room is be let. The room must be an integral part of your main residence and not a separate dwelling
More than one room can be let in the qualifying property but the rooms made available must be used for residential purposes. Let accommodation used as an office or for storage would not qualify for exemption under the scheme.
The Rent a Room scheme is for individuals and does not apply to companies or partnerships - though it can apply when individuals have the income jointly for instance husband and wife, or civil partners. In this particular case it’s also important to bear in mind that it does not have to be an employee of the company who is providing accommodation
If you want to charge a lodger more than the exempt amount of £4250 you can but you will need to declare the income over and above exempt allowance on a self assessment tax form. Alternatively you can declare all your letting income, ignoring the exemption and claiming any allowable expenses incurred in letting the property if this results in a lower tax liability.
Whichever route is taken it is essential that records of all income and expenditure incurred with renting a room are maintained and stored for a minimum of four years so they can be provided to HMRC should they request sight of them.
In addition to the tax aspects of renting a room your employees should also ensure the following points are also considered.
It is essential to ensure your mortgage lender has no issue or conditions regarding letting a room to a non-family member. Some mortgage agreements prevent this.
Your home insurance provider should be informed from the outset that you have a lodger. In some cases this may increase premiums, but if you do not disclose the information you could render any policies invalid should you need to claim.
Generally, standard home contents policies will not cover the belongings of a lodger and most won't cover any theft or damage of your contents by a lodger or a paying tenant in your home.
It would be advisable in most cases to get something in writing between the landlord and the lodger.
Most importantly – and especially if you are having to work with the lodger as well - take time to find your lodger and if possible set up more than one meeting before they move in. Don't simply accept the first person who turns up and can afford the rent. Remember you will have to live with this person in your own home, sharing common areas such as the kitchen and bathrooms. It is essential that you can get along.
If any of your employees or local residents can meet all the above criteria this may be a good option for some of your staff in particular to generate an additional income albeit temporarily whilst at the same time potentially offer you a lower cost in providing temporary accommodation for your short term staff.
If you are unsure on any the points made above, please give the TaxWise Advice Line a call on 01455 852555.