“Rent-A-Room” Relief – Donegal Democrat 9 September 2009
Question from John in Creeslough: I have “let” a room in my home. Am I obliged to pay tax on this, or is there a facility to claim a relief of some description?
1. THE CHARGE TO INCOME TAX
Section (S) 75(1) Taxes Consolidation Act (TCA) 1997 charges to tax under Schedule D Case V the profits or gains arising from any rent in respect of any premises. The income chargeable is the “profit” or “gains” that arise from the rent (i.e. the Net Rent Receipts), and not the actual Gross Rent Receipts.
2. THE LEGISLATIVE EXEMPTION
Section 32 Finance Act 2001 inserted a new section, Section 216A (TCA) 1997, which exempts from income tax, the “relevant sum” (€10,000 for 2008 and subsequent years of assessment), derived from the renting out of a room in a “qualifying residence”.
3. RELEVANT SUM
Under S216A(1) TCA 1997, a “relevant sum” is one which arises in respect of the use (as residential accommodation) of a room (or rooms) of a qualifying residence; it includes any payments in respect of meals, cleaning, laundry and similar goods or services which are incidental to the letting.
4. QUALIFYING RESIDENCE
Under S216A(1) TCA 1997, a “qualifying residence” is a residential premises (defined in turn as a building or part thereof used as a dwelling) located in the State and used by the individual claiming the relief as his sole or main residence during the tax year concerned.
If the word “during” is construed (and we have to date, received no assurance that this is the case) as meaning “at some time in” as opposed to “throughout” (which gives an entirely different meaning), then receipts from letting all the rooms in a residence during a period of temporary absence could qualify as relevant sums.
The Revenue Commissioners take the view that the relevant sums must be received while the individual concerned is occupying the residence as his sole or main residence. Moreover, they also take the view that the relief only applies to the letting of rooms as such and cannot cover the letting of an entire residence; they accept however, that receipts from letting a self-contained unit within a residential premises may qualify for relief (as per the Revenue issued Tax Briefing 44).
5. RENT PAYABLE BY THE CHILD OF THE INDIVIDUAL
With effect from 1 January 2007, S216A(3A) inserted by S14 Finance Act 2007, provides that the exemption will not apply to rent payable by a child of the individual.
6. QUANTIFYING THE RELIEF
Under S216A(2) TCA 1997 the relief extends to relevant sums chargeable under Schedule D Case V and also Schedule D Case IV (possibly relevant if services are charged for on a separate basis). Under S216A(5) TCA 1997, the relief applies to relevant sums (before deducting any related expenses) up to a limit of €10,000 (€7,620 per annum prior to 2008). Somewhat anomalously, under S216A(2) TCA 1997 no relief at all is due if the relevant sums exceed the limit for the particular tax year.
7. LOSSES AND CAPITAL ALLOWANCES
Additionally, under S216(2) TCA 1997 the relief is only given in relation to the net profit arising from such relevant sums and no relief is available in respect of losses arising in relation thereto. Where the relief is claimed, any potential claim for capital allowances under S284 TCA 1997 shall be deemed to have been made (even if such a claim is not in fact made), thus leading to an enforced “waste of allowances”.
8. SPLITTING THE ALLOWANCES
Under S217A(7) TCA 1997, where more than one individual is entitled to relevant sums from the same qualifying residence, the above limits are apportioned equally between the individuals concerned (i.e. the €10k threshold is split between those entitled (and willing) to share it). The relief will apply also for the purposes of PRSI and the Health Contribution Levy (as confirmed in the Revenue issued Tax Briefing 44).
9. NO ELECTION NECESSARY
The relief will apply unless the individual specifically elects otherwise (prior to the tax return filing date for that year) for the tax year concerned. Ordinarily, one would only gain benefit from such an election in cases where losses arise. In such a circumstance, it would be beneficial (particularly in the circumstance of a higher rate tax payer) to elect for the relief not to apply.
10. EFFECT OF “RENTAL INCOME” ON MORTGAGE INTEREST RELIEF AND PRINCIPAL PRIVATE RESIDENCE RELIEF
S216A(8) TCA 1997 states that where the relief applies, the receipt of relevant sums will affect neither an entitlement to Qualifying Mortgage Interest Relief under S244 TCA 1997, nor an entitlement to Principal Private Residence Relief under S604 TCA 1997.
11. INTERESTING POINT – SPECIAL TREATMENT FOR GAELTACHT AREAS
Section 12 Finance Act 2004 introduced a form of “Rent-A-Room” relief designed specifically for households in Gaeltacht areas. Encapsulated in S216B TCA 1997, the scheme known as “Scéim na bhFoghlaimeoirí Gaeilge” exempts such income from tax – this scheme has no income limit, and therefore represents a very important relief to home owners in these areas.
12. ILLUSTRATIVE EXAMPLE – HOW IT WORKS
Background: Martina from Dunfanaghy has lived alone for many years. Due to diminishing returns on her investments, she finds that her income is not sufficient to meet her day-to-day living needs. Her only recourse is to let part of her own home. She is not happy with the idea of a stranger using her cooking and washing facilities, hence she decides to offer accommodation on a full-board basis, which includes providing meals and laundry facilities. She registers with a local college and a young student contacts her in relation to securing the accommodation.
Details of Income from this source: Martina agrees to charge the young student as follows:
Bed and Breakfast €85
Lunch and Evening Meal €40
Laundry €6
Total €131
2009 Tax Treatment: in 2009, Martina receives €131 for 30 weeks from the young student, being a total of €3,930. For the purposes of determining whether the income is exempt, the related costs (of say €950) are ignored. The test is applied to the Gross Amount received. Since the Gross Amount received is below the exempt threshold of €10,000, Martina is not liable to tax under Schedule D Case V – i.e. the entire income from this source is exempt.
What if: If Martina had received a Gross Amount of €10,700, even though the allowable expenses (of €950) would have reduced the profit figure below the permitted €10,000, she would still be liable to Schedule D Case V on the entire Net Rental Profit. This profit would be taxed at Martina’s marginal rate of income tax.
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