Many websites urge property owners to start earning from their home or spare room - but what they don’t
always mention is that HMRC may want a piece of the action.
Very few sources of income are exempt from tax. Income from short-term property letting is likely to
need to be included in the calculation of your taxable income, although there are some occasions where
property-specific tax reliefs may apply.
Property tax reliefs
At the commercial end of the spectrum, bespoke tax rules exist for furnished holiday lettings, which
serve to treat letting income as trading income. This can bring a number of tax advantages: loan
interest to buy or improve the property, for example, is eligible for tax relief, and the income can be
treated as relevant earnings for the purposes of personal pension payments. But to access this regime,
strict qualifying criteria apply. These include a minimum period of availability to the public each
year and a minimum period of actual letting.
At the opposite end of the range, comes the property allowance. This is aimed to minimise the
compliance burden for low levels of letting income – for example where a room, or perhaps parking space
on the family driveway, is let out very occasionally. The allowance is £1,000 each year, and usually,
where gross property income is £1,000 or less, it is not necessary to report such income to HMRC. The
property allowance is not available where properties are held through a partnership or in a company.
Note, that if a property is held jointly (but not through a partnership) then each taxpayer has their
own property allowance. Where property income is more than £1,000, HMRC requires notification.
Practically speaking, many taxpayers are, in any case, likely to need to complete a tax return to
account for other income. It is also necessary to keep records of the property income against which the
property allowance is set.
The Rent a Room Scheme is another scheme designed to ease the admin burden for lower levels of income.
It exempts the first £7,500 of rent each year from a lodger in your only or family home – or £3,750
where rent is shared jointly. Note that this is different from the property allowance. It can also be
used for trading income from guest houses or bed and breakfast establishments. Where income is less
than £7,500, there is no need to complete a tax return.
HMRC compliance
HMRC is currently writing to some taxpayers where it has reason to believe that they may have earned
income from short-term property letting, not disclosed it to HMRC - and may need to pay tax. This
includes earnings from using property sites like Airbnb, Booking.com, VRBO and Holiday Lettings.
The letters are meant to nudge taxpayers to review their tax position, and put right any mistakes which
might have been made. If you get one, it will ask you to complete a Certificate of Tax Position within
30 days, and tick a box to say either that there is no income to disclose, or that there is. If there
is, HMRC asks recipients to use its online Digital Disclosure Service. It stresses that failure to
respond to the letter may trigger an enquiry into someone’s tax affairs.
Should you receive such a letter, please do discuss the position with us before any action is taken –
and with an eye to the deadline specified. Serious consequences can attach should HMRC determine
that a false declaration has been made on a Certificate of Tax Position, and there may be a more
appropriate means to make any disclosure necessary. We can help you take stock and discuss the best
route to take in these circumstances.