Written by Ray Coman
AirBnB UK Ltd have made a statement in their accounts for the year to 31 December 2019 that they will share data about their hosts with HMRC. It is a known practice that HMRC has the power to obtain tenant details from estate agents. A great leap of imagination is not required to expect tax enquiries to follow from a simple matching exercise between the taxpayers’ history already available to HMRC and AirBnB host data. The tax penalty is lower when a disclosure is made voluntarily than when it has been prompted. There is an opportunity for AirBnB hosts to bring their tax affairs up to date without suffering increased penalty.
The sections below address some of the commonly asked queries that are likely to result from this.
The rent-a-room relief scheme exempts income from a lodger which is under £7,500 per tax year. The tax year runs to 5 April. If income is above £7,500, this amount can be used instead of a proportion of actual costs. Each year, a calculation can be carried out to assess whether a proportion of actual expenses will result in a lower tax liability than the rent-a-room relief.
HMRC have indicated that a Tax Return is only required if income is above the rent-a-room relief exemption. It can be inferred that exempt rental income does not in itself trigger a Tax Return requirement.
If the individual already files a Tax Return, the rent-a-room is indicated by a check box on the property supplement. Provide there are no profits, it is a single entry on the Return.
If letting income is £1,000 or less, it is possible to claim the property trading allowance. If income is below £1,000 it is not necessary to report income and expenses to HMRC. Where turnover is below £10,000 and profits are between £1,001 and £2,500 it is possible to ask HMRC to add estimated rental profits to the tax code. The result is that the amount of tax deducted at source from employment or pension earnings will be increased to collect additional tax due on rental profits. Where profits are £2,500 or below the requirement to file a Tax Return can be dispensed with. If either turnover is above £10,000 or profits are above £2,500 it will be necessary to file a Tax Return. Turnover is income before expenses and profit is income after expenses. The Tax Return filing requirements explained above apply regardless of whether profits are from a lodger or some other kind of tenant, and irrespective of whether the landlord has used AirBnB.
Technically, under section 7 of the Taxes Management Act 1970 everyone needs to file a Tax Return who has rental income. However, HMRC’s approach is welcomed where the tax at stake does not warrant undue compliance costs of a Tax Return.
Tax residency in the UK is broadly based on days of physical presence. A landlord with a property situated in the UK has to file a Tax Return regardless of residency. The section above explains the circumstances in which a person has to file a Tax Return. All UK landlords globally are required to file a Return. Many non-resident landlords will be eligible for the personal allowance. A Tax return could still be required even where profits are not taxable because income is below the personal allowance threshold. Refer to the question above for further guidance on which Returns require filing.
Many short-let accommodation is made available to holidaymakers especially in Britain’s tourist hotspots. AirBnB is a popular way of marketing this kind of property. It provides income from a holiday home which could otherwise be vacant. If the property meets the conditions for furnished holiday letting, business asset disposal relief will be available to reduce capital gains tax on disposal. It is also possible to deduct interest, rather than being subject to a restriction on mortgage interest on rental property. For a property to be furnished holiday let, it needs to be let at least 105 days a year and not to the same person for more than 31 continuous days. Other conditions apply but the two just mentioned are the more restrictive.
A person’s home is not liable to capital gains tax because of a capital gains tax exemption known as principal private residence relief. Provided there is a period of actual occupation both before and after the period it is let, the period of absence from the property will be a deemed period of occupation. This applies provided the period of absence is not more than 3 years and there is not somewhere else that is the landlord’s home while it is being let. A typical scenario – in which a person lets their home via AirBnB while away on holiday - will have no capital gains tax consequence. For longer periods, letting relief could apply if the property has been the landlord’s home at some stage.
Carefully consider the expenditure which can be deducted from profits. Where a letting agent is not used there is greater scope to deduct costs for running the business, such as those related to use of home as office.
For the most recently passed tax year (2019/20 at the time of writing), a Tax Return should be filed. An amendment can still be filed for any Tax Return of the preceding tax year. For any year prior to 2019/20 which does not have an existing or outstanding self-assessment record, a Let Property Campaign disclosure should be made. Let Property Campaign disclosure can be made for tax years prior to 2016/17 even where a Tax Return has been filed. If Tax Returns are up to date for said years, HMRC have stated no tax liability will arise from an unprompted disclosure on income more than six years old.