Rent a room relief provides a £7,500 tax break for people renting out furnished rooms in their main or only residence on an ad hoc basis and was first introduced in 1992 to incentivise individuals to make spare capacity in their homes available for rent.

Back in the 1990s, when first introduced, is was meant to increase the quantity and variety of low-cost rented housing and address an acute housing shortage, but the growth of AirBnB and similar online digital platforms and peer-to-peer services has changed the room rental landscape radically.

The government is now under pressure to review the tax position for people renting rooms through online sites.

The current eligibility criteria for Rent a Room relief do not specify any particular length of let, so Rent a Room relief could be given on income from 365 one-day lettings to different people or from one 365 day letting to the same person.

HMRC data shows that the number of individuals benefitting from Rent a Room relief and needing to complete a self-assessment tax return has risen by 38% from 2007-08 to 2014-15.

This trend towards greater use of the relief is supported by external evidence from insurers Liverpool Victoria, which suggests that the number of people letting out spare rooms has almost doubled between 2009 and 2014, increasing from 1.4% to 2.7% of homeowners.

Given the scale of change in the sector, the government wants to explore whether the design of rent a room relief provides the right incentives for the current rental market.

In April 2017, the government introduced a new £1,000 tax free allowances for individuals, to make it easier for them to earn a small amount of income from renting out or sharing their property.

The consultation focuses on who uses the relief, whether it is working as the government intends and ideas for reform of the relief.

Currently, the government has difficulty identifying the extent of the use of the relief as limited information is provided on tax returns and landlords are not required to report detailed information on how the rooms are rented out and for how long.

The Treasury consultation states: ‘Room relief is limited by the amount of data landlords are required to complete in their tax return.’

There is no explicit definition in legislation on the purpose of the let or the specific length of tenancy that is eligible. As a result, individuals can provide tenancies of any length or purpose – including very short term holiday accommodation – and still benefit from the relief.

The government is considering whether to change the qualification for the tax relief so that it can only be used to ‘support residential accommodation provided on a longer-term basis, or for a certain purpose’.

It wants to know who uses the relief, what kinds of activity they are carrying out, why they might choose to let spare accommodation in their main or only residence, and the effect of the relief on the housing market.

Importantly it is considering how removal of the relief and the retention of only the £1,000 property allowance to use against this income, would affect the market.

It is also keen to explore other approaches, for example in Ireland and France there is a ‘residential’ test applied to the equivalent tax relief, which restricts the relief to use by residential homeowners only. Equally it is considering whether to limit use of the relief for longer-term lets of more than 31 days, for example, which would have an impact on people renting their rooms through online portals.

The consultation closes for comment on 23 February 2018. Responses should be sent to [email protected]

Treasury consultation, Rent a room relief

Report by Sara White