Rent a room relief: call for evidence Response by the Chartered Institute of Taxation

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Lionel Blake
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1 Rent a room relief: call for evidence Response by the Chartered Institute of Taxation 1 Introduction 1.1 The Chartered Institute of Taxation (CIOT) welcomes the opportunity to respond to the Government s call for evidence on rent-a-room (RAR) relief. 1.2 The main objectives of the call for evidence are to: Find out more about the use of the relief; Establish whether the relief is working as the government intends; and Help inform any potential reform of the relief. 1.3 To meet the above objectives the call for evidence poses 13 questions across the following 3 areas: Current use of the relief; Is the relief working as the government intends; and Evidence and options for reform. 1.4 To inform the CIOT s response to the call for evidence we have undertaken a survey of CIOT and ATT members to gather evidence in each of the above-mentioned areas. We received some 687 responses to our survey. A summary of the responses are included as an Appendix to this submission and are referred to in responding to the questions posed in the call for evidence. 1.5 As an educational charity, our primary purpose is to promote education in taxation. One of the key aims of the CIOT is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. Our comments and recommendations on tax issues are made solely to achieve this aim; we are a non-party-political organisation. 1.6 Our objectives in responding to the call for evidence include:

2 Greater simplicity and clarity, so people can understand how much tax they should be paying and why; Greater certainty, so employers and employees can plan with confidence; and Responsive and competent tax administration, with a minimum of bureaucracy. 1.7 In Sections 2 to 4 below we respond to the specific questions in the call for evidence in order. 2 Current use of the relief 2.1 Q1: Do you have evidence that could help the government understand more about the number of individuals benefitting from Rent a Room relief, and the type of activity that they are carrying out? 2.2 We asked our members how many of their clients claim the relief and whether they claim the relief themselves. In our members experience, in most cases between 1 and 9 of their clients claim the relief (see Appendix and response to Q2 for more detail). 2.3 We also asked our members what type of activity and types of accommodation the relief is being claimed on, as well as the most common use of the relief. In our members experience, in the clear majority of cases the relief is claimed for the letting of a spare room to longer term lodgers rather than short term holiday/guest house accommodation (e.g. bed and breakfast (B&B)) (see Appendix and responses to Q4, Q5, and Q6). 2.4 Q2: Do you have any evidence that suggests that there are increasing numbers of people letting out rooms in their main home? If so, do you have any evidence that suggests this relates specifically to holiday or guest accommodation rather than residential? Has there been a move towards one or the other over time? 2.5 We asked our members whether the number of RAR relief claims had changed in the last 10 years and whether the type of activity on which RAR relief is claimed has changed in that time. While most respondents indicated that the numbers claiming the relief had not changed, around a quarter indicated that there had been an increase in the number of claims. Also, approximately half of respondents indicated that there had been no change in the type of activity (i.e. residential lettings verses holiday lettings) on which the relief is claimed. This suggests to us that there has not been a major shift away from residential lettings and towards holiday/guest accommodation in the last decade. (See Appendix and responses to Q8 and Q9.) 2.6 Q3: Is the use of the relief generally by individuals letting out rooms for residential purposes, or as holiday/guest accommodation, or for a different purpose? 2.7 We asked our members what the split of RAR relief claims is between residential lettings and holiday/guest accommodation. In our members experience, less than 25% of lettings are for holiday/guest accommodation (see Appendix and response to Q7). 2.8 Q4: To what extent do those using the relief choose whether to advertise to lodgers for certain purposes (e.g. residential versus holiday/guest accommodation), or are those using the relief responding to demand in the market? If it is a choice, what drives that decision? P/tech/subsfinal/OMB/2018 2

3 2.9 We asked our members whether those claiming the relief advertise for either just long or short terms lets, or whether they advertise for either. In our members experience, around 61% advertise for one or other of residential lets and holiday/guest accommodation, whereas around 39% will advertise for both (see Appendix and response to Q10) We also asked our members, where only holiday/guest accommodation is advertised for, what the main driver is for this. Where only holiday/guest accommodation is offered this is mainly because the RAR claimant does not want a full-time lodger, although we note that for a sizeable minority it is because the claimant can charge a higher rent to short term tenants (see Appendix and response to Q11) We also asked our members a supplementary question: what are the (two) main factors driving the decision to let a room. 92% of respondents indicated that the requirement for additional income was one of the main factors for letting rooms (see Appendix and response to Q12) Q5: To what extent is the length of tenancy for lodgers a consideration for those using the relief, when advertising a room for rent? 2.13 See paragraph 2.9 above in our members experience, RAR relief claimants will mostly advertise for either long or short term lets rather than both (see Appendix and response to Q10) Q6: Do you have any evidence that there are regional differences in whether rooms are being rented out for different purposes or tenancy lengths? 2.15 Our survey did not collect any evidence on regional differences about the division between residential lets and holiday/guest accommodation. We did, however, ask our members where in the UK most claims (by their clients) for RAR relief arise. In our members experience, around 46% of claims to the relief arise in London and the South East of England (see Appendix and response to Q3). 3 Is the relief working as the Government intends? 3.1 Q1: To what extent do you think the existence of Rent a Room relief provides an incentive for those using the relief to let out rooms in their home / take on a lodger? If Rent a Room relief did not exist, and only the 1,000 property allowance were available to use against this income, would current users of the relief still take in a lodger? 3.2 We asked our members whether the existence of RAR relief provides an incentive to let out rooms or take in a lodger. The clear majority of respondents either agreed or strongly agreed that the relief provided an incentive (see Appendix and response to Q13). 3.3 We also asked our members whether current users of RAR relief would still take in a lodger if the relief did not exist, and only the 1,000 property allowance were available. Responses to this question were rather mixed with about 27% of respondents agreeing (or strongly agreeing) that RAR relief claimants would continue to take in a lodger and about 46% disagreeing (or strongly disagreeing) (see appendix and response to Q16). P/tech/subsfinal/OMB/2018 3

4 3.4 We also asked our members two additional questions. Firstly, whether the raising of the RAR relief threshold in April 2016 had increased the incentive to let our rooms or take on a lodger. Around 76% of respondents agreed (or strongly agreed) that the raising of the threshold had acted as an incentive, with the other 24% indicating that it had not made any difference (see appendix and response to Q14). 3.5 And, secondly, what is the typical amount of annual income that is derived from lettings within the RAR scheme. Overwhelmingly respondents indicated that income fell within the current 7,500 threshold, with only about 17.5% of claimants, typically, having annual income exceeding the threshold (see Appendix and response to Q15). 3.6 Q2: How significant is the role of Rent a Room relief in supporting the government s wider objective to have a diverse supply of housing options? What impact, if any, do you feel the relief is having on the supply of housing? Are there any other economic or social benefits from the relief? 3.7 We asked our members whether RAR relief supports the Government s objective for a diverse supply of housing options. About 63% of respondents agreed (or strongly agreed) that it does (see Appendix and response to Q17). 3.8 We also note that in 31% of cases one of the two main factors for letting a room is to maximise utilisation of space (see Appendix and response to Q12). 3.9 Q3: Do you think that all types of letting activity, regardless of the purpose or length, should be able to benefit equally from Rent a Room relief? 3.10 We posed two questions to our members to explore the type of lettings which should benefit from RAR. Firstly, we asked our members what types of letting activity should be able to benefit from RAR relief and provided a range of options. 98% of respondents thought that the relief should apply to the letting of a spare room. See Appendix and response to Q18 for details of the other types of activities members thought that the relief should apply to Secondly, we asked our members what types of use by tenants should RAR relief apply to and we provided a range of options. 66.5% of respondents indicated that a room let to an individual for 31 days or more (for any reason) should benefit from RAR relief and 41% thought it should be available for all the different options we provided. See Appendix and response to Q22 for details of the other types of uses members thought the relief should apply to. 4 Evidence/options for reform 4.1 Q1: Do you have experience or knowledge of a system for taxing Rent a Room income that is simpler, fairer or more effective than that in the UK? 4.2 We asked our members whether they had knowledge of other systems for taxing RAR type income outside the UK. While most respondents answered no a few provided comments on other systems. One comment we noted is that the UK s RAR scheme means that noncompliance with UK tax requirements is minimalised, whereas in other jurisdictions many P/tech/subsfinal/OMB/2018 4

5 property owners simple fail to declare the income (or do not know that they should). As to systems in other tax jurisdictions, comments received were that: The French system for lodgers is slightly more complicated; In Cuba people are allowed to let 2 rooms each for holiday purposes so long as they come up to a particular standard and they are inspected; and In USA less than 14 days is not taxable. 4.3 We have also had sight of the response to the call for evidence by the Association of Taxation Technicians (ATT) and would endorse their comments in respect of the differences between the systems in the UK and Ireland. 4.4 Q2: One example the government is aware of is in Ireland and France, where there is a residential test applied to the equivalent tax relief. Do you think the UK should look to restrict access to Rent a Room relief only to those homeowners letting out their rooms for residential purposes? What would be the pros and cons of such an approach? 4.5 We asked our members a series of questions in response to this question in the call for evidence. Firstly, we asked our members whether RAR relief should continue to apply to holiday lettings and guest accommodation. Responses to this question were split with 52.5% of respondents in favour of the relief applying to holiday/guest accommodation and 47.5% against (see Appendix and response to Q19). 4.6 We then asked our members some hypothetical questions. The first of which was, if RAR relief was restricted to longer term/residential lettings would this deter individuals from letting rooms as holiday/guest accommodation. Around 49% of respondents thought it would, compared with about 22% who thought it wouldn t (see Appendix and response to Q20). 4.7 We then asked what members thought the best way would be to determine whether a letting is residential as opposed to holiday/guest accommodation. We provided three options (duration of stay, purpose of stay and range of services/facilities). 58.5% of respondents indicated that the duration of stay (where the stay must be 31 days or more) would be the best option for determining whether or not a letting is residential (see Appendix and response to Q21). 4.8 Q3: Do you think that there should be differences in eligibility for Rent a Room relief according to type of letting activity, purpose or length? Do you think homeowners should only be eligible to claim Rent a Room relief where they are offering a room for let on a longer-term basis (e.g. 31 days or more)? What would be the pros and cons of such an approach? 4.9 See paragraphs 3.10 and 3.11 above we do not think, from the responses received, that there is a clear consensus that there should be differences in eligibility for RAR relief according to the type of letting activity, its purpose or length (see Appendix and responses to Q18 and Q22) We also asked our members a hypothetical question: should RAR relief only be available on rooms let for 31 days or more. Responses to this question were mixed with around 47.5% agreeing (or strongly agreeing) that relief should be restricted to longer term lets and the rest neither agreeing or disagreeing (or strongly disagreeing) (see Appendix and response to Q23). P/tech/subsfinal/OMB/2018 5

6 4.11 Q4: Do you have any further ideas or evidence about how the UK might reform rent a room relief? 4.12 We first asked our members whether they though that the current threshold for RAR relief of 7,500, introduced in April 2016, was appropriate. Over 70% of respondents thought it was with about 21% indicating it should be increased and under 9% suggesting it should be reduced (see Appendix and response to Q24) We then asked our members whether RAR relief and the 1,000 property allowance should be merged into a single relief. About 59% of respondents thought it should (see Appendix and response to Q25) We also asked our members whether there were aspects of the current RAR scheme which cause difficulties in practice and where guidance 1 could be improved A number of respondents thought that the guidance currently available was adequate. However, other comments on the guidance and practical application of the RAR scheme we received including: Improved guidance for Airbnb type transactions (e.g. work with online platforms so that they provide information to those advertising with them as to what activities fall within the RAR scheme, what income the 1,000 property allowance would apply to and what amounts to trading, etc) (NB. The dividing line between trading, e.g. as a B&B, and renting is a common issue.); Clarify when connected and/or unconnected annexes with or without separate entrances, and temporary divisions of self-contained units etc, qualify or do not qualify for the RAR scheme (NB. This aspect of the rules was a regularly recurring theme in the responses we received); Clarify whether the relief is available where the homeowner is not resident in the property during the period of the rental (for example, where the homeowner vacates the property and lets it for festivals or sporting events, or where the homeowner exchanges properties for holidays). Compare this to the situation where the homeowner has a long-term lodger but is temporarily absent for their own holiday; Provide guidance on the interaction between RAR relief and the trading and property income allowances; Add a mathematical example to the basic guidance on Gov.uk (e.g. to indicate that contributions to heating and lighting, council tax, wi-fi and other shared expenses etc are included in total receipts and how the relief works compared to claiming actual expenses); Add a mathematical example to clarify how the RAR threshold operates where the property is in multiple ownership (and what is the position if one of the owners lives in the property but another lives elsewhere); Make the guidance clearer that the RAR scheme only applies to income from an individual s only or main residence and not to second homes; Explain how the RAR scheme works in relation to rental income received from adult children, dependent relatives, etc; 1 HMRC guidance can be found at which then links to the HMRC SA Helpsheet at Detailed guidance on the RAR scheme for HMRC staff and tax professionals is contained within HMRC s Property Income Manual at onwards. P/tech/subsfinal/OMB/2018 6

7 Improve the guidance on whether or not an SA return is required to specifically refer to rental income within the RAR threshold; Confirm that lettings which fall within the RAR scheme do not affect entitle to the CGT PPR relief; 4.16 Lastly, we asked members for their ideas for reforming RAR relief. Responses to this question supported answers to previous questions, such as whether or not the relief should be retained for holiday lets, with views both for and against allowing relief for holiday lettings and guest accommodation (pros and cons included administrative simplicity (e.g. no need to retain detailed records and complete a SA return) and incentive to utilise spare rooms versus distortion of competition with trading businesses such as hotels etc). A number thought that the relief should be kept simple and left as it is. Other suggestions included: If it must be taxed, provide an easy online calculator to check whether any return of information is needed and a one-step method to return the information without having to sign up fully to Self-Assessment/[Require individuals to] register for relief (outside of SA) to encourage those renting out property to make the disclosure and reduce amount unknown to HMRC; The relief ought to be the same for CGT/PPR, as for income tax; Extra allowance should be available for long term lets; The relief should be proportionate to the value of the property/market rent in the area; Increase allowance for first time buyers with mortgages; Allow the relief to increase per room rented; The limit should be reviewed every year/ Update every year in line with CPI; and Consider making all student rents exempt/incentivise people to house foreign students. 5 Acknowledgement of submission 5.1 We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the Chartered Institute of Taxation is included in the List of Respondents when any outcome of the consultation is published. 6 The Chartered Institute of Taxation 6.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax P/tech/subsfinal/OMB/2018 7

8 policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 18,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 22 February 2018 P/tech/subsfinal/OMB/2018 8

CALL FOR EVIDENCE RENT A ROOM RELIEF

ICAEW REPRESENTATION 25/18 CALL FOR EVIDENCE RENT A ROOM RELIEF ICAEW welcomes the opportunity to comment on the call for evidence Rent a room relief published by HM Treasury on 1 December 2017. This response