HMRC have sent ‘nudge’ letters to individuals who they believe have undeclared income from letting holiday homes and properties through sites such as Airbnb and Booking.com.
If you have received income from holiday lets, you must inform HMRC by completing a self-assessment tax return. This return must be filed online, no later than January 31st, after the end of the tax year to which it relates.
Income from property
If you receive income from letting a property, you will need to declare it to HMRC and pay tax on any rental profit under self-assessment.
If you let a holiday home, you may be able to benefit from the more favourable tax rules that apply to furnished holiday lettings. Alternatively, if you let a room in your own home, you may be able to take advantage of the Rent a Room relief measure.
Any taxable profit earned from letting a holiday home must always be considered when working out your total income tax liability for the year.
The property allowance (currently set at £1,000) means that if your income from letting is £1,000 or less for the tax year, you can enjoy the income tax-free, without the need to report it. If your income is more than £1,000, you can deduct the property allowance instead of the actual costs, should this be beneficial when working out your taxable rental profit. However, you will need to report this to HMRC and pay tax on it.
Furnished holiday lettings
Furnished holiday lettings (FHLs) enjoy more favourable tax treatment than residential lets.
Unincorporated landlords can deduct interest and finance costs in full when calculating their rental profits for FHLs (for residential lets, relief is given as a tax reduction equal to 20% of the costs). FHLs also benefit from certain capital gains tax reliefs, such as business asset rollover relief.
However, it is not sufficient to let the property as a holiday let on occasion in order to be treated as an FHL for tax purposes. To qualify, alongside the property being in the UK or the EEA and adequately furnished, it must also pass all three of the following occupancy tests:
- The property must be available for letting for 210 days in the tax year
- The property must be let for at least 105 days in the tax year
- Lets exceeding 31 continuous days must not, in total, exceed 155 days in the tax year
Periods in which you are using the property, or where it is let at a reduced cost, or freely, to family and friends, are not taken into account when evaluating whether the above requisites have been met.
If you do not meet the aforementioned requisites for a particular property in a particular tax year, your holiday home may still be able to qualify as a holiday let, given you have several holiday properties and these conditions are met on average across all of your holiday homes.
Alternatively, if you have satisfied these conditions in the past, you may be able to make a period of grace election.
If your holiday home does not qualify as an FHL, it will instead be taxed in accordance with other, non-FHL, residential lets.
Rent a Room scheme
You may be able to claim Rent a Room relief if you let a room in your own home as a short-term let, such as through the site Airbnb. Under this scheme, you can earn up to £7,500 each tax year from letting a furnished room in your own home.
If you share this income with at least one other person, you can each earn £3,750, tax free, within the tax year. Where your income is below the Rent a Room limit, you do not need to report it to HMRC, however, should it exceed this limit, you will be required to complete a tax return. Though it is important to note that you can claim Rent a Room relief and deduct your Rent a Room limit (£7,500 or £3,750, as appropriate) rather than your actual expenses when calculating your taxable profit.
Dealing with the ‘nudge’ letter
This ‘nudge’ letter, which has been sent by HMRC where they believe an individual has failed to declare their rental income, includes a Certificate of Tax Position to be completed within 30 days.
Before taking any action, we would strongly advise you to seek counsel. There is no statutory requirement to complete the Certificate of Tax Position.
If you have received income from letting out your holiday home which exceeds the tax-free limits, and you have not told HMRC about it, there may be tax, interest and penalties to pay.
It is important that this is managed correctly, as you may be able to settle on more favourable terms, should you make use of HMRC’s disclosure facility to notify them of the tax that you owe, rather than simply ignoring the letter.
If you need help with any holiday let queries or letters you may have received from HMRC, please do not hesitate to contact us.