In general, money you earn from hosting is income and will be subject to tax. However depending on the amount you earn from hosting, it may or may not need to be declared to HM Revenue & Customs.
So what’s the current situation?
If you’re renting out your entire or even just a room of your property which is also your main home for short periods, this is technically taxable over a certain threshold but there are various reliefs available before you need to report to HM Revenue and Customs (HMRC).
1. Rent-a-Room Relief
If you’re renting out a furnished room in your only or main residence, then you can claim ‘rent a room relief’. This relief is still available in cases where you offer services such as serving breakfast or laundry.
You will not be taxed if the gross rents for the year, before deducting expenses, are less than £7,500 for 2016/17 tax year onwards. (Please note that the threshold was £4,250 in 2015/16 and previous tax years).
The annual rent-a-room relief allowance is available per property, so if the property is owned jointly, the rent-a-room allowance is split between the two owners.
However- here is the caveat – in order to be eligible for this relief, then you must also be living there! so for those of your who might rent your room out whilst you jet off to sunny climates, this relief is not available to you. For those who might rent out a room via Airbnb in say London as a pied-a-terre then this relief is available to you.
If you exceed the threshold
If the rent-a-room threshold is exceeded or if you choose to pay tax on the rent less expenses under the normal rules for calculating taxable rental profits (described below), then you must declare your rental income on a UK self-assessment tax return.
Just note that if you incur a loss, you may also prefer to account under the normal rules to offset the loss against any rental profits in future years.
2. Micro Entrepreneur’s – Rental Income – Main home
From Apr 2017, there is a £1,000 property income allowance aimed at ‘micro-entrepreneurs’, such as those letting out property meaning that if you’re in receipt of income below the new allowance, it will not be subject to income tax. This means you don’t need to report this income to HMRC.
Before 6 April 2017 any rental income received before this date was treated as taxable income irrespective of the amount received.
If your gross income receipts are in excess of these amounts, the recipient can deduct the £1,000 Micro Entrepreneurs Allowance against their gross income to arrive at their taxable rental income figure, as opposed to calculating and deducting the actual expenses they have incurred to arrive at their taxable profit.
3. UK Rental Income – Normal rules
If you’re renting out your entire home or separate dwelling/flat then you’re required to declare your property income and expenses on a UK self-assessment tax return. The amount of income tax due depends on the profits from your rental business and other sources of taxable UK income.
Under the normal rules, net rental profit or loss is calculated by taking the total rental income and deducting allowable expenditures:
Allowable expenses are expenses incurred ‘wholly and exclusively’ in the course of the rental business including but not necessarily restricted to:
- Letting agent fees
- Legal fees
- Accountancy fees
- Building and contents insurance
- Mortgage interest (restricted after 6 April 2017)
- Maintenance and repairs to the property (but not large/capital improvements)
- Utility bills, like gas, water, and electricity
- Rent, ground rent, service charges
- Council Tax
- Services you pay for, like cleaning or gardening
- Other direct costs of letting the property, like phone calls, stationery and advertising
Capital expenses are not deductible for income tax purposes but you should keep full records of any such expenditures, as this will attract Capital Gains Tax (CGT) relief. CGT could be due when a property is disposed of that has been rented out for a period during its ownership.
4. Furnished Holiday lettings
There are special rules if your property qualifies as a furnished holiday letting:
Remember that to qualify as a furnished holiday letting (FHL), the accommodation must be in the UK or European Economic Area (EEA) and commercially let.
Accommodation can only qualify as FHL if it passes all these conditions:
- the property is offered to let for at least 210 days a year
- it’s let for more than 105 days a year
- no single let is more than 31 days
- you charge the going rate for similar properties in the area (‘market value’)
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If you let properties that qualify:
- You can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs Relief, relief for gifts of business assets, and relief for loans to traders)
- You’re entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures
- The profits counts as earnings for pension purposes
To find out more contact LeeP Accountants Accountants on 01733 699033 or email [email protected]