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An ever-increasing number of property owners are offering their home for a short-term let either around sporting events like Wimbledon or through Airbnb whilst on vacation.
A common misconception is that the income received is covered by the Rent a Room scheme but this is not the case if the whole property is let out.
In these cases, the income must be declared on a Self-Assessment Tax Return and the resulting tax paid accordingly. This is an area HMRC are focusing on as part of their crack down on tax evasion.
You would qualify for the Rent a Room scheme if you are a resident landlord letting out a part of your only or main home on a furnished basis. This can be a room or an entire floor but not a purpose-built flat within the premises.
For the 2016-17 tax year, the scheme allows you to earn up to £7,500 per year tax-free. For the 2015-16 tax year, the threshold was £4,250. These thresholds apply to the property and would be halved if you share the income with your partner or someone else. Should you elect to charge for additional services such as meals or laundry, all payments received must be added to the rent in determining your total income.
If your overall income is below the threshold, the tax exemption is automatic and there is no requirement to report this to HMRC.
However, you must complete a tax return if you earn more than the threshold. If this is the case, you can either opt into the scheme and claim your tax-free allowance or, instead, record your income and expenses in the property section of your tax return.
In theory, you can be a resident landlord irrespective of whether or not you own your home but, if you are a lodger, you need to be certain that your tenancy agreement allows you to take in a lodger.
The manner in which you share your home impacts the kind of tenancy the lodger has and their resulting rights and how the tenancy can be ended.
For the resident landlord, your lodger is deemed to be an ‘excluded occupier’ if they share a kitchen, bathroom or living room with you or a member of your family.
If this is the case, you only have to give them reasonable notice to end the letting, which is commonly reckoned to be the length of the rental payment period, and you can evict them without redress to a court order.
If your lodger does not share any living area with you and your family, they would be classed as an ‘occupier with basic protection’.
In this case, you must serve them a written ‘notice to quit’ and the notice period would need to be stipulated in the tenancy agreement. If your lodger refuses to leave, you would need a court order to evict them.
There are no restrictions per se on the level of the rent you can charge and this can include Council Tax and utility bills. However, this needs to be agreed with your lodger beforehand.
There are other considerations:
As well as the Income Tax on your rental income, it is important to consider the Capital Gains Tax consequences.
You are entitled to full Private Residence Relief, which would mean the gain on the sale of your home would be exempt from Capital Gains Tax when you sell the property, if the following conditions apply:
As a result, whilst it may be tempting to take in more than one lodger at a time, you must bear in mind that this could result in a Capital Gains Tax liability in the future.
If you let rooms to more than two lodgers at the same time, your property would be classed as a House in Multiple Occupation which has far more stringent standards and safety requirements and can require a licence.
If you have any questions around any aspect of renting your property, please email us at tax@cooperfaure.co.uk for an initial, free consultation to discuss your situation.
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