Chapter 1: Rent-a-room relief
Overview
2921.The sections in this Part are based on section 59 of and Schedule 10 to F(No 2)A 1992. These provisions are entitled “Furnished Accommodation” in the source legislation but are commonly known as “rent-a-room”, the name adopted in this Act.
2922.“Rent-a-room” gives relief in one of two forms for householders who provide furnished accommodation in their homes for lodgers. One form is complete tax exemption for the rent, provided it does not exceed a certain level - the “full relief” form. If the rent does exceed that level the rent-a-room profit is taxable. But taxpayers can choose to have the profit calculated by deducting a fixed amount as expenses, rather than their actual expenses, if that is advantageous - the “alternative method of calculation” form of the relief.
2923.References to “profits or gains” in the source legislation which relate only to income are rewritten in this Chapter omitting the reference to “gains”. This continues the tidying up of such references started in section 46(3) of and Schedule 7 to FA 1998.
Section 784: Overview of Chapter 1
2924.This section introduces the relief. It is new.
2925.Subsection (2) introduces the key factor in determining the form of relief available: the level of gross receipts.
2926.Subsection (3) introduces the full form of the relief where gross receipts are modest.
2927.Subsection (4) introduces the alternative method of calculation form of the relief where gross receipts are larger.
Section 785: Person who qualifies for relief
2928.This section states the basic conditions that an individual must satisfy to obtain the relief. It is based on paragraph 2 of Schedule 10 to F(No 2)A 1992.
2929.Subsection (1)(a) is a general condition that is satisfied only if the taxpayer claiming rent-a-room relief satisfies the more detailed conditions in respect of the letting.
2930.Subsection (1)(b) helps in restricting the relief to the simpler cases for which it is intended. In referring to the income types to which rent-a-room relief is relevant it avoids reference to a “source” – the term used in paragraph 2(3) of Schedule 10 to F(No 2)A 1992 – because what is meant by a “source” in this context may not always be clear. So in rewriting references to a “source”, subsection (1)(b) refers to trades, lettings or agreements.
2931.Paragraph 2(3) of Schedule 10 to F(No 2)A 1992 disqualifies an individual from relief if the income from any source from which his or her rent-a-room income is derived also includes income that is not rent-a-room income. “Source” is not defined.
2932.The source of the income arising from a trade is the trade itself.
2933.When Schedule 10 to F(No 2)A 1992 was enacted, relief was available on income from furnished lettings if the income fell within Schedule D Case VI (rather than Schedule A). The source of such income was considered to be the letting in question. FA 1995 brought income from furnished lettings in the United Kingdom within Schedule A and consequentially amended Schedule 10 to F(No 2)A 1992 to make relief available on such income. The amendment was not intended to be read as changing the source of the income for the purposes of that Schedule. For a Schedule A business to be a “source” for this purpose could have capricious results: running a separate business of letting commercial property would disqualify an individual from rent-a-room relief on Schedule A income for letting a room in his or her house (but rent-a-room relief could still be available to a person who ran both a bed-and-breakfast business at home and a separate commercial trade).
2934.As regards amounts incidental to the letting, and within Schedule D Case VI, on which rent-a-room relief might be available (for example, receipts for goods or services such as meals or laundry) the source of the income is the agreement to provide the goods or services in question.
2935.So subsection (1)(b) refers to whatever is the appropriate source for each kind of income for which rent-a-room relief is available.
2936.Section 785, unlike the provision in paragraph 2(1) of Schedule 10 to F(No 2)A 1992, does not impose the condition that to be within rent-a-room, all the letting income (or income related to a letting) must be trade or UK property business income. Specifically, it allows rent-a-room relief to apply where certain income related to a letting is received that would, in the source legislation, be within Schedule D Case VI. The existence of any such amounts would, under the source legislation, disqualify the taxpayer from rent-a-room relief in respect of all his or her income. See Change 128 in Annex 1.
2937.The approach in subsection (1)(b) also removes a potential disqualification from rent-a-room relief in particular circumstances. See Change 129 in Annex 1.
Section 786: Meaning of “rent-a-room receipts”
2938.This section defines “rent-a-room receipts”. It is based on paragraphs 2, 4 and 8 of Schedule 10 to F(No 2)A 1992.
2939.Subsection (1)(a) makes explicit what is merely implicit in the source legislation: that the let accommodation must be in the United Kingdom to be within rent-a-room. This approach also removes a disqualification from rent-a-room relief that can arise in respect of a let United Kingdom residence when exceptionally the individual also lets an overseas residence at the same time. See Change 129 in Annex 1.
2940.Subsection (1)(b) refers to an “income period”. The period for which receipts must satisfy certain conditions is identified in the source legislation as the “basis period”. “Basis period” was appropriate to Schedule D Case I income but less so when applied to Schedule A income where it was potentially confusing. The use of “income period” in the rewritten section makes it possible to avoid using “basis period” for property income and income charged under Chapter 8 of Part 5 of this Act: the conditions have to be satisfied by reference to the events of an “income period”. That is, for trade profits, the basis period (see subsection (3)). But for property income and income charged under Chapter 8 of Part 5 of this Act it is the tax year or, if letting begins or ends during the tax year, the date of, respectively, the beginning and the end of the letting (seesubsection (4)).
2941.One incidental consequence of this approach is the way in which it works in conjunction with the requirement in subsection (1)(c). It makes explicit the period during which the “only or main residence” requirement must be met in the years when a letting begins or ends and the income is taxable as property income (in the source legislation it was not clear what was meant by “basis period” in these cases). Now it is explicit that the period is concurrent with the period of the letting and does not extend to the whole of the tax year.
2942.Subsection (1)(d) ensures that when the relief is in respect of income chargeable under the trading or property income Parts of this Act, it continues to apply only to amounts to which it applies under the source legislation, that is, to rent-a-room lettings which give rise to trade or property business profits. This provision is necessary because the charges under the trading income and property income Parts of this Act go wider than purely trade and property business profits and include (for example) post-cessation receipts.
2943.Subsection (1)(d) also extends rent-a-room relief to income from the provision of the incidental services mentioned in subsection (1)(a) that would, in the source legislation, be charged under Schedule D Case VI and excluded from rent-a-room. See Change 128 in Annex 1.
Section 787: Meaning of “residence”
2944.This section is based on paragraph 7 of Schedule 10 to F(No 2)A 1992.
2945.Subsection (1)(b) refers to a “caravan or houseboat”. There is an Act-wide definition of “caravan”: see the commentary on section 875 of this Act and Change 148 in Annex 1.
2946.There is also an Act-wide definition of “houseboat”: see the commentary on section 878(1) of this Act and Change 150 in Annex 1.
Section 788: Meaning of “total rent-a-room amount”
2947.This section introduces and defines a key rent-a-room term: “total rent-a-room amount”. It is based on paragraphs 9 and 11 of Schedule 10 to F(No 2)A 1992.
2948.The term “total rent-a-room amount” is new. It sets out how the amount of income to be compared with the limit is calculated. The level of an individual’s “total rent-a-room amount” determines which form of rent-a-room relief the individual is entitled to: the full relief or the alternative method of calculation.
2949.Subsection (1)(b) includes any relevant balancing charges in the “total rent-a-room amount” to remove an anomaly in the source legislation. See Change 130 in Annex 1.
Section 789: The individual’s limit
2950.This section determines the individual’s rent-a-room limit for the tax year. The “limit” is the maximum amount of rent-a-room income that is exempt from tax. It is based on paragraphs 5 and 6 of Schedule 10 to F(No 2)A 1992.
2951.Subsection (1) signposts to the section which sets out the full conditions that must be met to qualify for the full “basic amount”.
Section 790: Exclusive receipts condition
2952.This section states the detail of the conditions that must be met to qualify for the full “basic amount”. It is based on paragraph 5 of Schedule 10 to F(No 2)A 1992.
2953.Subsection (1)(a) makes it clear that a third party letting of any kind in the same residence triggers the halving rule. That in turn reflects the policy in the source legislation that only the “simplest” cases should get the full value of the relief.
2954.The source legislation refers to a “basis period”. The approach of section 786 (described in the commentary on that section) is reflected in section 790 where reference to basis periods is avoided.
Section 791: Full rent-a-room relief: introduction
2955.This section introduces the sections that provide for full relief. It is based on paragraph 9 of Schedule 10 to F(No 2)A 1992.
Section 792: Full rent-a-room relief: trading income
2956.This section provides for full relief when the rent-a-room income is trading income. It is based on paragraph 9 of Schedule 10 to F(No 2)A 1992.
2957.This section is simpler than the two sections that immediately follow it. That is because for both of the latter the rent-a-room income element may have to be separately identified from non rent-a-room income taxable under the same Part of this Act. That is not the case for rent-a-room income that is trading income. If receipts of a single trade include both rent-a-room and non rent-a-room income none of that income is eligible for relief (paragraph 2(3) of Schedule 10 to F(No 2)A 1992 rewritten as section 785(1)). So a trade qualifies for rent-a-room relief only if its income consists wholly of rent-a-room income.
2958.A person carrying on a trade is normally eligible for capital allowances or liable to balancing charges under CAA. The effect of subsection (2) is that neither are taken into account when full relief is due under section 792. Saying that the profits and losses are nil achieves that because capital allowances and balancing charges are taken into account in calculating those profits and losses.
Section 793: Full rent-a-room relief: property income
2959.This section provides for full relief when the rent-a-room income is property income. It is based on paragraph 9 of Schedule 10 to F(No 2)A 1992.
2960.Subsection (3) states explicitly what is merely implicit in the source legislation. That is, in calculating the profits of a property business, no capital allowances or balancing charges are to be made in respect of rent-a-room related assets.
2961.This form of the rule is needed because the rent-a-room letting may be part of a property business comprising other lettings. Tax under Part 3 of this Act is charged on the profits of a UK property business, which may include activities other than rent-a-room lettings. Section 793 cannot treat the profits of the whole UK property business as nil, but instead expressly excludes all amounts relating to rent-a-room activities from the calculation of the profits of the UK property business. Those amounts include capital allowances and balancing charges which relate to rent-a-room lettings and, accordingly, section 793(3) excludes them.
Section 794: Full rent-a-room relief: income chargeable under Chapter 8 of Part 5
2962.This section provides for full relief when the rent-a-room income includes income charged under Chapter 8 of Part 5 of this Act. It is new.
2963.Subsection (1) reflects the change referred to in the last paragraph of the commentary on section 786. The extension of rent-a-room relief to certain income charged under Schedule D Case VI in the source legislation requires the rule in this section to relieve such income when the relevant conditions are met. See Change 128 in Annex 1.
2964.There is no equivalent in this section of section 793(3). Such a provision is not needed for rent-a-room income charged under Chapter 8 of Part 5 of this Act because there is no statutory provision for capital allowances for that type of income.
Section 795: Alternative calculation of profits: introduction
2965.This section introduces the sections that provide for the second form of the relief – the alternative method of calculating profits. It is based on paragraph 11 of Schedule 10 to F(No 2)A 1992.
2966.Paragraphs (a) to (c) state the three conditions that must be met. See Change 130 in Annex 1.
Section 796: Alternative calculation of profits: trading income
2967.This section sets out the basis of calculation when the rent-a-room income is wholly or partly trading income and it exceeds the rent-a-room limit. It is based on paragraph 11 of Schedule 10 to F(No 2)A 1992.
2968.Subsection (2)(a) makes explicit what is merely implicit in the source legislation: the retention of any balancing charge where the alternative method of calculation applies. As in exemption cases, there is no entitlement to capital allowances if the taxpayer elects for the alternative method of calculation (paragraph 11(6) of Schedule 10 to F(No 2)A 1992). But - and this differs from exemption cases - any balancing charge remains. In the source legislation the retention of the balancing charge is merely implicit in paragraph 11(6) of Schedule 10 to F(No 2)A 1992: it is simply not mentioned as part of the disapplication of the allowance under section 55 of CAA.
2969.Subsection (3)(b) gives a formula for calculating the correct deduction when the rent-a-room income consists of trading income and another type of income. In these circumstances the total rent-a-room deduction is apportioned between the rent-a-room income types.
Section 797: Alternative calculation of profits: property income
2970.This section sets out the basis of calculation when the rent-a-room income is wholly or partly property income and it exceeds the rent-a-room limit. It is based on paragraph 11 of Schedule 10 to F(No 2)A 1992.
2971.Subsection (3)(b) makes explicit what is merely implicit in the source legislation: the capital allowances adjustments that are required. Like section 796(2)(a), subsection (3)(b) refers explicitly to the retention of any balancing charge where the alternative method of calculation applies. But subsection (3)(b) also refers to an allowance. That is required because this section deals with profits that may represent only part of the overall profits of a property business. So to give proper effect to the rent-a-room adjustment it needs to state explicitly what is to be included in, and excluded from, the overall calculation of the profits of that business.
Section 798: Alternative calculation of profits: income chargeable under Chapter 8 of Part 5
2972.This section sets out the basis of calculation when the rent-a-room income is income that is taxed under Chapter 8 of Part 5 of this Act and it exceeds the rent-a-room limit. It is new.
2973.Subsection (1) reflects the extension of rent-a-room relief to certain income that is, in the source legislation, charged under Schedule D Case VI. See Change 128 in Annex 1. It gives a deduction rule for income charged under Chapter 8 of Part 5 of this Act that reflects similar rules for trading and property income in, respectively, section 796 and section 797.
2974.Subsection (3) provides for an apportionment of the available rent-a-room deduction between income charged under Chapter 8 of Part 5 of this Act and other income. It does not address the case where an individual’s rent-a-room income consists wholly of income charged under Chapter 8 of Part 5 of this Act. That is because such income can, in the rent-a-room context, exist only in company with other (normally property business) rent-a-room letting income.
2975.There is no reference to any capital allowances adjustments because there is no statutory provision for capital allowances for income within Chapter 8 of Part 5 of this Act.
Section 799: Election not to apply full relief
2976.This section allows a taxpayer to opt out of full relief (it may not always be beneficial, for example, if he or she has losses to use). It is based on paragraph 10 of Schedule 10 to F(No 2)A 1992.
2977.It follows the approach of the source legislation in making the exemption automatic unless the taxpayer opts out. That is because, in the type of small case to which the exemption will most frequently apply, the likelihood is that it will be beneficial.
2978.Subsection (3) converts references, in the source legislation, to the Board of Inland Revenue and to an officer of the Board of Inland Revenue into references to the Inland Revenue. See Change 149 in Annex 1.
2979.Subsection (3) expresses the time limit by reference to the normal Self Assessment rules.
Section 800: Election for alternative method of calculating profits
2980.This section provides a rule that allows a taxpayer to choose the alternative method of calculation if he or she qualifies. It is based on paragraph 12 of Schedule 10 to F(No 2)A 1992.
2981.This section follows the approach of the source legislation in making an election necessary in order to benefit from the alternative method of calculation. That is because this form of the relief is likely to apply to larger, more complex cases. Whether or not the relief is beneficial in these cases will depend on the particular circumstances.
2982.Subsection (5) converts references, in the source legislation, to the Board of Inland Revenue and to an officer of the Board of Inland Revenue into references to the Inland Revenue. See Change 149 in Annex 1.
2983.Subsection (5)(a) expresses the time limit by reference to the normal Self Assessment rules.
Section 801: Time limit on adjustment of assessment
2984.This section allows adjustments to be made to assessments within a certain time to give effect to rent-a-room elections or withdrawals of elections. It is based on paragraphs 10 and 12 of Schedule 10 to F(No 2)A 1992.
2985.Subsection (2) expresses the time limit by reference to the normal Self Assessment rules.
Section 802: Minor definitions
2986.This section provides interpretation for terms not defined elsewhere. It is based on paragraphs 9 and 11 of Schedule 10 to F(No 2)A 1992 and paragraph 86 of Schedule 2 to CAA.
