Thresholds for letting out a room should factor in the extra costs of providing digs for students writes Tim Bracken

There is a severe shortage of rental accommodation, particularly for students and this demand will peek in the next few weeks.

The Union of Students in Ireland (USI) has called on people with spare accommodation to consider renting rooms in their houses or provide digs to students to alleviate the shortage.

There is excellent incentive, for home owners to rent out rooms in their house where the rental income is treated as nil and therefore is exempt from income tax provided it does not exceed €12,000 per annum. The income is treated as nil and it is not computable for tax in addition to another income a person may have. So for instance if John has an income of €30,000 from his job and receives rent a room income of €9,000 making a gross income of €39,000 for the year he only pays tax on €30,000. The rental income is also exempt from PRSI, income levy and the health levy (for 2010 and prior years) and from PRSI and the universal social charge (USC) (for 2011 and subsequent years).

It is a very attractive incentive. However there are a number of drawbacks to this scheme which makes the renting of rooms or providing digs less attractive.

The exemption applies to the GROSS income whether it is merely just rent or the provision of meals, laundry services etc.If the gross income exceeds €12,000 in the year the full exemption is lost. Therefore if John is letting a room in his house and receives 11k he is entitled to the exemption on the full 11. However if the income is 12.5k he loses the full amount.This is a complete disincentive to rent a further room.

EXEMPTION FROM INCOME TAX ONLY

Whilst the income of €12,000 (or less sum) is treated as nil for income tax PRSI and USC it is not an exemption when applied to the assessment for any social welfare payments or qualification for a medical card. So if you are in receipt of some means tested social welfare payment the money received from renting a room is regarded as income when being assessed for the payment. Similarly it is regarded as income when being assessed for a medical card and the income my result in you exceeding the qualification threshold and losing these valuable benefits.

PROVISION OF DIGS

Many people would prefer to provide digs on a Monday to Friday basis leaving the house free to them for the weekend. However the provision of digs, (meals, laundry, light and heat) is much more expensive than just solely renting the room but no allowance is made for this additional expense. The €12,000 is a gross limit and no deductions are allowed for the provision of a more expensive type of serviced accommodation.

The relief applies only to individuals, Married couples or civil partners share the relief. Payments made by a child of the person or the persons civil partner, or not exempt but payments by other family, nieces or nephews, are.

The room or rooms must be in a residential premises that is the person’s sole or main residence during the particular tax year. A person may live in more than one residence but can only avail of rent-a-room relief in respect of his/her sole or main residence. Revenue regard an individual’s sole or main residence as that which is the person’s home for the greater part of the year and where friends and correspondents would expect to find him/her. In other words you cannot avail of the relief in your home and also holiday home. The person does not have to own the residence and it could, for example, be occupied as rented accommodation. It is not possible to let an entire residence because the room or rooms that are let must form part of the residence and the residence must be occupied by the individual receiving the rent as his/her sole or main residence. The room or rooms can comprise a self-contained unit within the residence such as a basement flat or a converted garage attached to the residence. However, a self-contained unit that is adjacent to the residence but not actually attached to it cannot qualify for the relief.

The room or rooms must be used for the purposes of residential accommodation, i.e. the occupants are effectively using the room on a long-term basis, either on its own or in conjunction with other parts of the residence, as a home. Therefore income the provision of short term B&B is not exempt.

The incentive is in principle an excellent incentive and has the potential to unlock substantial well needed accommodation. It has been in existence since the Finance Act, 2001 (section 32) but it has not been a success because of its drawbacks and I suggest the following amendments to make it more attractive.

1. The €12,000 limit should be a threshold and anything in excess of this should be taxed. Losing the full exemption is probably keeping a lot of rental rooms off the market.

2. Allow the €12,000 to be an exemption from assessment for certain social welfare payments and medical cards.

3. Allow a notional deduction the provision of serviced accommodation, digs.

Tim Bracken is a barrister and is the author of the Probate handbook and the forthcoming book, The Irish Modern Family, Relationships and the Law.


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