Struggles faced by homeowners due to landlord tax regulations when attempting to rent out their extra space
In the midst of a housing shortage, housing expert Matt Hutchinson proposes an intriguing solution: if just one in 20 of Britain's spare rooms were rented out, it would add the equivalent of a city the size of Birmingham to the nation's housing stock. This idea revolves around the Rent a Room Scheme, a policy that allows homeowners to earn up to £7,500 tax-free from renting out a furnished room.
The scheme, which is open to households who let a furnished room in their main home to a lodger, and tenants who sublet with permission, has been a lifeline for many homeowners struggling to meet mortgage payments, such as Alex Hobbs, a manager in the construction industry. After the pandemic lockdown, Hobbs rented out a spare room to help cover his expenses. However, he found that he had to pay tax on rent over £625 a month, which was a major disadvantage.
Despite the clear benefits, the Rent a Room Scheme's tax-free threshold hasn't risen in nine years, despite rental prices and the cost of living increasing. This has led to a situation where the bill for breaching the allowance can be larger if someone has been dragged into a higher tax bracket by the extra income. Alex Hobbs, for one, had to hire an accountant to check his income declaration, adding to his costs.
The Government maintains that the current threshold is set at an appropriate level. However, Laura Suter, director of personal finance at the investment platform AJ Bell, states that the costs of renting a room may not provide sufficient incentive for some.
In 2016, Matt Hutchinson campaigned for the threshold of the Rent a Room scheme to be lifted from £4,250 to £7,500. His suggestion that a higher threshold would mean more rooms coming onto the market has been echoed by many, including those who are worst affected by the freeze on the Rent a Room Scheme.
Recently, the question of hiking the tax-free allowance for the Rent a Room Scheme has been raised in Parliament, most recently in February. If the threshold had risen in line with RPI inflation, it would now be £11,500 and cover 94% of UK postcode areas.
Meanwhile, across the Irish Sea, the Rent a Room Scheme's tax-free threshold remains at €14,000 per year without inflation adjustment since 2013. This lack of adjustment is often due to policy choices aimed at balancing government tax revenues with incentives for landlords.
In conclusion, the Rent a Room Scheme's tax-free threshold remains stagnant, likely due to policy choices to keep the threshold stable, although no explicit official reasoning was found. As the housing crisis deepens, the debate over whether to raise the threshold continues, with many advocating for a change to alleviate the shortage and provide extra income for homeowners.
- Raising the tax-free threshold for the Rent a Room Scheme has been advocated for by many, including housing expert Matt Hutchinson and those who are struggling to meet mortgage payments for their property.
- The Government's decision to keep the Rent a Room Scheme's tax-free threshold static, despite rental prices and cost of living increasing, has been noted as a disadvantage by homeowners such as Alex Hobbs, as it forces them to pay tax on earnings above a certain amount, which may not provide enough incentive to rent out a room in some cases.
- If the Rent a Room Scheme's tax-free threshold had risen in line with RPI inflation, it would now be £11,500 and cover 94% of UK postcode areas, potentially providing extra income for homeowners and helping alleviate the housing shortage.
