Budding home entrepreneurs looking to make the most of their closeness to Wimbledon or Lord’s this summer should be wary that HM Revenue & Customs will be looking for any undeclared income, says Blick Rothenberg.
Budding home entrepreneurs looking to make the most of their closeness to Wimbledon or Lord’s this summer should be wary that HM Revenue & Customs will be looking for any undeclared income, says leading accounting, tax and advisory practice Blick Rothenberg.
Stefanie Stapleton, Personal Tax Manager at Blick Rothenberg, said: “A summer of sports awaits the UK this year and sporting events often provide opportunities for enterprising individuals to make extra money - but even if the British weather plays ball, taxpayers should also be careful that the taxman doesn’t rain on their parade.
“Residents of Wimbledon, St John’s Wood, Henley and Goodwood often find their properties in high demand during the summer months, as tennis, cricket, rowing, motoring and horse racing fans descend. The rise of websites such as Airbnb demonstrates the popularity of short term lets and taxpayers should bear in mind that if potential customers can see their advertisements online, so can HMRC.”
Stefanie said that this ranged from selling strawberries and cream, renting out a parking space or allowing souvenir sellers a pitch in the front garden, to moving out for the two week tournament period and renting the whole house. Even a relatively small amount of additional income can lead to a tax liability, however from 6 April 2017 two new annual allowances are due to be introduced and should be available to taxpayers in these situations.
She said: “A new trading allowance exempts the first £1,000 of trading income per annum and would cover, for example, selling strawberries or bottled water from outside your home. The second allowance covers the first £1,000 of rental income, which would include income from letting out parking spaces or driveways as pitches for traders.
“However, the two allowances were scrapped at the last minute, along with other measures, from the revised Finance Bill, but the postponed clauses are expected to be introduced in a second Bill, with effect from 6 April 2017. If your income exceeds these allowances, you may need to register for Self-assessment.”
For those individuals renting out rooms in their own homes the income can be tax free provided it doesn’t exceed certain thresholds. Stefanie explained: “Many people could be on to a real winner as renting their house out for two weeks in a sought after area could pay the mortgage for the whole year. For example, during the tournament fortnight Wimbledon properties are being rented from £1,120 a week for a one-bedroom apartment to £7,000 a week for a four bed roomed house. However, this income may need to be declared to HMRC.”
The ‘Rent-a-Room’ scheme generally applies to owner-occupiers and tenants who receive rent from letting furnished accommodation in their only or main home but can also be claimed by those running bed and breakfasts or guesthouses. The relief is separate to the rental income allowance and the two cannot be used together.
Stefanie said: “Gross receipts of up to £7,500 may be earned before tax is due. This limit applies to a tax year and whilst it can be reduced to £3,750 if the property is owned jointly, it is not reduced according to the letting period. Under the scheme, expenses cannot be deducted from the gross income and any excess income above the £7,500 is taxable. The alternative method available to taxpayers is to tax all rental income and claim deductions for expenses.
“For those individuals who are already registered for Self-assessment, any rental income must be reported on their annual Tax Return regardless of whether the ‘Rent-a-Room’ scheme applies and the appropriate box should be ticked. For those not already in Self-assessment and whose rents are below the relief threshold, the exemption applies automatically and it is not necessary to register.”
As HMRC have announced an intention to review the Rent a Room relief to ensure it is more aligned with long term letting arrangements, this may be one of the last opportunities for short term lets to benefit from the relief.
Points to be aware of:
- Be clear on the difference between “trading” and rental income. Any income received by virtue of letting property or land is taxed as rental income.
- Each individual has a personal allowance of £11,500 which is available to be offset against all taxable income. An additional £1,000 allowance should be available to offset against trading income and a further £1,000 allowance should be available to offset against ad hoc rental income.
- For those renting out a room in their main residence, the first £7,500 of rental income is exempt under Rent a Room relief.
- Taxpayers should be aware that once these allowances are exceeded, the income may need to be reported to HMRC as the penalties for failing to do so can be significant. For those taxpayers not in Self- assessment the deadline to register is 6 months after the end of the relevant tax year (by 5 October 2018 for income earned in the 2017/18 tax year). The penalties for submitting a late tax return start at £100, rising to £1,000 plus 5% of any tax due depending on the date of submission.
- Interest will be charged on late payments of tax and late payment penalties may also be charged of up to 10% of the tax due.
For more information please contact Stefanie Stapleton
. The full article featured in Bloomberg BNA August 2017 issue, you can view it here