Popular sites like Airbnb are inspiring some homeowners to generate income by letting out part or all of their home. But what are the tax consequences of this?
Updated 12 October 2020
The tax consequences all depend on how much you make, how much of your home you let out and how often it is made available.
Letting out all or part of your home
The amount of tax you pay will depend on what profits you’ve made from letting plus, any other income you have. Be aware that Airbnb and other online providers report letting income details to HMRC.
Rent-a-room relief (currently £7,500 per year) is available if letting part of your main residence. If the gross receipts don't exceed that figure there is no income tax liability on your profit. If your receipts exceed £7,500, you can choose either to pay tax on the excess, or on your actual profit after attributable expenses.
In calculating your profit, you can deduct certain allowable expenses – such as a proportion of building and contents insurance, council tax (or business rates), maintenance/repairs to the property. Seek specialist advice for the complete list. A tax deduction is also given for loan interest and other finance costs, but restrictions and conditions apply.
The relief applies to your property, not to you as an individual. So if you co-own your home with another, the £7,500 allowance has to be split between you both.
Also, if you have any other letting income of less than £1,000 in a tax year (for example letting out a car parking space), this is exempt from tax but is not in addition to the £7,500 allowance.
Your lettings are likely to be within the VAT definition of quasi-hotel or holiday letting, so if you are either VAT-registered personally already or the rents exceed the VAT registration limit (currently £85,000 a year), you will have to account for VAT at 20% on those rents, although able to reclaim the VAT on associated costs. For more information on letting furnished holiday accommodation see here.
Making Tax Digital
The Government's Making Tax Digital (MTD) initiative involves maintaining digital records and using MTD-compliant software to provide information to HMRC. For VAT, MTD already applies to VAT-registered businesses, and from April 2022 will also apply to those not VAT-registered.
MTD is then intended to apply to income tax from April 2023. This will affect landlords with an annual rental turnover of over £10,000, as well as the self-employed.
Business rates may be payable, although there are many reliefs. Generally, liability here depends on the property being available for let for at least 140 days.
Be careful if you’re looking to sell the property
If you are looking to sell the property in the future, do get specialist advice regarding the effect of any letting you've done or plan to do. A gain on disposal of your main residence is generally exempt from Capital Gains Tax (CGT). But any period of letting activity will restrict the exemption – the rules became much tighter from 6 April 2020. For more on this, see here.
Do seek professional advice to ensure you don't end up with a hefty CGT bill.
Finally, do check the terms of your mortgage, property insurance and lease, if there is one.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary, if you would like advice or further information, please speak to your usual Shipleys contact.
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