Rent-a-room tax relief applies to landlords who let out a furnished room in their own home, or to those who run a guesthouse or bed and breakfast. Short-term lettings, such as Airbnb, are also included in the relief. The reliefs allow the first £7,500 earned from the letting tax-free. The tax- free amount is halved if you share the income with your partner or someone else.
If you earn less than the threshold- currently £7,500 (July, 2017), the tax exemption is automatic and therefor you don’t need to do anything. If you earn more than the threshold, you must complete a tax return. At this point, you can opt into the scheme and claim your tax-free allowance.
There is no limit to how much of your home you can let out. However, if you intend to install a separate entrance and facilities between the room and your living area the room may not be regarded are part of your home and therefore you may not qualify for the relief.
There is, however, an exception to those who let furnished accommodation in a self-contained flat where the division of the room is temporary. There are no direct and definitive rules about what constitutes a ‘temporary division’. The HMRC will question how long partitions have been present and how long you intend for them to remain. The taxman will also want to know if the separate residence has its own address and entrance.
If you plan to install kitchens or bathrooms in the property, it will be very difficult to argue that the divided residences are temporary.