HMRC’s rent-a-room scheme is an optional exemption scheme, which permits individuals to receive up to £7,500 of tax-free gross income (income before expenses) from renting out spare rooms in their only or main home. The exemption is divided where the income is shared with a partner or someone else. As long as income is below the annual threshold, it does not need to be reported to HMRC but if it exceeds, it needs to be reported to HMRC via the self-assessment system.
In order to authorize under the rent-a-room scheme, the living quarters must be furnished and a lodger can obtain a single room or an entire floor of the house. However, if the house is converted into separate flats that are rented out, the scheme doesn’t apply and also the scheme cannot be used if the accommodation is in a UK home which is let while the landlord lives overseas.
Also, it does not apply where part of a home is let as an office or other business premises. The relief only covers the circumstance where payments are made for the use of living quarters or accommodation.