Tax Tips when hosting paying guests

It is becoming increasingly popular for people to rent out rooms or their homes as holiday accommodation. More and more holiday makers are looking for accommodation via websites such as Airbnb. This growing trend means holiday makers are finding cost effective and alternative accommodation and landlords are making a bit of extra money. However additional income means there are potential tax implications which landlords should be mindful of to ensure they avoid any unwanted and unexpected bills from HM Revenue & Customs.

Income received from lettings such as those via Airbnb is taxable income, however there are ways to mitigate the tax payable.

Tax reliefs available
Should an individual let a room in their main residence there are two ways to calculate the taxable profits. An individual can calculate the gross rents received and deduct from this expenses linked directly to the lettings. Alternatively, the landlord letting a room in their own home can claim relief under the “rent a room scheme”. Here, as long as certain criteria are met, the landlord can earn gross rents up to £7,500 per year tax free and all expenses are disregarded. The rent a room relief should be sufficient to remove most Airbnb landlords letting rooms in their own homes from any tax charge on the income received. This threshold is halved if the income is shared with a partner or other individual.

It is worth stressing that the rent a room scheme is only available to “live in landlords” letting out rooms in their own homes. Where an individual lets a whole property, or rooms in a property, which is not their main residence, the default position would be to deduct expenses from the income received in calculating the taxable profits. However, during the 2016 Budget, a new £1,000 tax free allowance was announced for ‘micro-entrepreneurs’, coming into effect from April 2017. Should an individual earn up to £1,000 from property letting the income will not need to be declared. Should the income exceed £1,000 the landlord can choose whether to claim actual expenses incurred, or to deduct the flat £1,000 from the income.

VAT Implications
Landlords who are VAT registered due to other business interests need to consider if their VAT registration will impact on any holiday lettings income. If, for example, a couple own and run an unincorporated business as a partnership and the partnership is VAT registered this will mean any other business income will be covered by this VAT registration. If they also jointly own their home and rent out spare bedrooms via Airbnb they will need to charge VAT at the standard rate. This could mean their prices are less competitive than others in the area.

Capital Gains Tax
Finally, the sale of the family home is normally exempt from capital gains tax as it attracts Principal Private Residence relief. This relief will be preserved in full where they have met the conditions for rent-a-room relief. For any period where the home was not occupied as the sole or main residence then this portion of gain will not attract the relief, however each individual currently has an annual exemption of £11,100 for capital gains tax.

If you are considering renting out rooms or property as holiday accommodation you should seek further advice. The specialist tax team at Wright Vigar would be delighted to discuss your circumstances and offer you personally tailored advice – simply call us on 01522 531341 or email david.barraclough@wrightvigar.co.uk.