Rent a room scheme allows individuals to earn up to £7,500 a year tax free from renting out a spare room in their main or only residence.
The relief was first introduced in 1992 with the intention of incentivising people to take in lodgers rather than rent out whole properties.
Shared occupancy test
Following on from a recent call for evidence that the rent a room scheme works as projected, the government decided to keep the relief at the current level, however, a new measure is to be introduced to help stop any abuse of the existing system – a shared occupancy test.
This new test will require a landlord to be living and physically present in the property for all or part of the letting period, for the relief to apply. Those who don’t satisfy this test, will no longer be eligible for the tax relief.
“The purpose of rent a room relief has always been to support spare rooms, rather than whole properties, which should properly fall under the normal rules for taxing property income. A new shared occupancy clause will return the relief to its original purpose and clarify its role in the wider property tax regime”, reads the consultation.
Unnecessary burden for landlords
However, according to the Association of Accounting Technicians (AAT), “this will add unnecessary complexity to the tax system” and “it’s also likely to reduce accommodation availability and choice because many ‘landlords’ will simply choose not to rent out their spare rooms when they are not present,” says Phil Hall, Head of Public Affairs & Public Policy at AAT.
He continues: “Many will be forced to complete a self-assessment tax return when they otherwise wouldn’t and many more will be required to laboriously keep records of when they were and weren’t at home.”
A bulletproof test?
It is not yet clear whether or how the shared occupancy can be proved but “if no proof is required then the scheme will be open to widespread abuse. If proof is required, it’s difficult to see exactly how shared occupancy can be proven in practice, especially when this may relate to irregular nights here and there,” explains Hall, suggesting that HMRC have not properly thought that through.
In his opinion, dropping these plans and allowing rent a room relief to continue “as it has for over 25 years as a simple to administer, easy to understand tax relief that’s available to all”, would be a win-win for everyone.
“A shared occupancy test is a headache being created for what the Treasury’s own analysis states will be a ‘negligible’ impact on tax receipts.”
The new legislation is due to come into force in April 2019 and will bring an end to the tax relief for those landlords renting their whole properties or spare rooms whilst they are away. They will be eligible for a much lower property allowance of £1,000 instead.
