HM Revenue and Customs (HMRC) is worried that a change in the way some homes through online services are let is allowing landlords to pocket thousands of pounds in rent without declaring the money.

The problem for the tax man is the move is perfectly legal – providing the landlord follows some strict rules.

The tax break is the Rent A Room Scheme, which was introduced some years ago as a way of rewarding homeowners for sharing their spare rooms with lodgers.

Under Rent A Room, landlords can earn up to £7,500 a year rent in the tax years after April 2016 without having to declare the income on a tax return under self-assessment.

HMRC publishes a detailed help sheet about the scheme which explains how to make a claim.

The points to remember are:

  • You have to rent a furnished room in your own home and share the kitchen and bathroom
  • The rental can be to a different tenant each week or the same tenant for the entire tax year – who the tenant is does not matter
  • The tenants have to have a rent book
  • The £7,500 can include cash for services, like providing breakfast, cleaning or washing bed linen
  • A landlord can have more than one lodger at a time, but the £7,500 rent limit is for a property in a year, not each tenant

Having a room in a property let to lodgers and a home elsewhere does not count. The property with letting rooms must be the landlord’s main residence.

The landlord does not have to own the property – it can be a letting property owned by someone else.

The reason short term lets are unpopular with HMRC, insurance companies and mortgage lenders is the business model disrupts that of a traditional letting property.

Landlords like the opportunity of earning extra cash without paying tax.

However, besides opening the way for Rent A Room tax breaks, other issues arise such as standard home insurance not covering lodgers, while lenders and freeholders break out in a sweat over the thought of dealing with subletting.