A timely reminder of the tax rules, if you are letting residential property

If, as an individual, you generate income from letting residential property, whether that is property in the UK, overseas, maybe you let a spare room, offer Airbnb or have a Holiday let, then it is important to ensure you understand the specific rules in relation to your rental income, what should be disclosed and the levels of tax due.

There is an array of tax rules to be considered when letting residential property. Some key points to highlight are:

• If you rent a room in your home, there is the Rent a Room Scheme which can provide an automatic tax exemption if you earn less than £7,500.
• If you let qualifying Furnished Holiday properties there are several tax perks, which standard residential letting does not qualify for. This includes escaping the mortgage interest relief restriction.
• If you let property overseas, just because you pay tax overseas does not mean you do not need to disclose this on your UK tax return.
• Changes with how tax relief is now given on mortgage interest expenditure means a higher rate tax payer will only receive basic rate tax relief, meaning the taxable profit is higher than the actual profit made. In addition, the way in which relief is now given means there is an increase to the total rental profits thus increasing an individual’s total income, which can have a knock-on effect on aspects such as reducing the amount of child benefit that can be claimed.
• Tax relief for residential property let furnished has also changed. Wear and Tear allowance once provided a 10% deduction but this has now been superseded by the replacement of domestic items relief.
• Many get caught out by misunderstanding what expenditure is an allowable expense to deduct from rental income to reduce profits subject to income tax and what is an allowable expense to deduct against sale proceeds to reduce a gain subject to capital gains tax.
• Airbnb letting is taxable for VAT purposes and therefore the gross rent charged counts towards the VAT threshold calculation. In many cases Airbnb could qualify for rent a room relief or if letting a separate property, for the tax benefits of furnished holiday lets.
• There is a £1,000 tax free allowance that can be considered in cases of small amounts of letting income.

Not only is it important to be aware of the rules to ensure income and expenditure is correctly disclosed, but also to ensure the reliefs and exemptions available are considered to ensure you are letting your property as tax efficiently as possible.

One thing for certain is that undisclosed income is something HMRC will only continue to investigate, as the Government seek to repay the continued Covid-19 support.

The recent announcement that Airbnb is passing details of individuals incomes to HMRC, following a deal made in respect of its own unpaid tax, is a timely reminder of this.

If you are concerned that you may not have made the correct disclosure then there are two disclosure facilities for property income and overseas income, through which you can look to make a notification to HMRC and take advantage of the best possible terms.

If you are not sure of the disclosure requirements of your property income, you would like to understand how you can make a voluntary disclosure to HMRC, which may benefit from more favourable negotiation of any penalties due, or you would like to understand if you are structuring your letting income in the most tax efficient way, then please get in touch.