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Topic: Elections and claims

Election for rent-a-room relief alternative basis
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Election for rent-a-room relief alternative basis

Election for rent-a-room relief alternative basis

If you let a room in your own home, the rent you receive is exempt from income tax if it is less than the rent-a-room limit of £7,500. If the rent exceeds the limit the relief doesn’t apply and the taxable profits are equal to income less expenses. However, you can elect to use the alternative basis.

General Rule

The general rule for rent-a-room relief is that you can disregard income from letting part of your home up to an amount of £7,500. If the income exceeds this amount, the taxable profits are calculated by deducting tax-allowable expenses from the rent (including payments received for services, e.g. provision of meals).

However, an election under s.800 Income Tax (Trading and Other Income) Act 2005 allows you to instead work out the taxable profit by deducting the rent-a-room amount from the rent etc. receivable. This removes the need to provide HMRC with details of allowable expenses with your tax return and, where the allowable expenses are less than £7,500, reduces the taxable profit.

Example

Anne, an additional rate taxpayer, has income from lodgers of £9,000 in 2017/18. She has allowable expenses of £5,000. In the absence of an election, she would pay tax on the £4,000 profit (i.e. 45% x £4,000 = £1,800). If instead she makes a s.800 election, she will only pay tax on £1,500, i.e. 45% x £1,500 = £675 - saving £1,125.

Conditions

To make the election the income must be such that it would have qualified for rent-a-room relief if it hadn’t exceeded the £7,500 limit. That is to say that the rent must derive from UK furnished residential accommodation that was the recipient’s main or only residence for at least part of the relevant tax year.

Once made, the election will apply to the tax year specified, and all subsequent years until:

  • you give notice withdrawing the election; or
  • the next year in which total rents to which rent-a-room relief can apply fall below £7,500. In this case you are deemed to have withdrawn the election.

If you wish the alternative basis to apply after it has been withdrawn, a new election will be required.

Time limit

The election (or withdrawal notice) can be made up until the first anniversary of the normal self-assessment filing deadline.

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