Letting out your spare room or attic during holiday season or at other times of the year may seem like a quick and easy way to boost your income, but if you don't declare your earnings you could face penalties.
Depending on the level of income you generate tax may be due and you may need to register with HM Revenue & Customs (HMRC). If the gross rents received from letting out your main residence exceed the rent-a-room threshold, the income must be reported to HMRC. Under the rent-a-room relief, the first £4,250 of gross receipts can be earned tax-free. This threshold rises to £7,500 from April 2016. The limit applies to a tax year and, while it falls to £2,125 per person (or £3,750 from April 2016) if you own the property jointly with someone else, it is not reduced according to the lettings period. Under the relief, expenses cannot be deducted from the gross income and any excess income above the threshold is taxable.
If the threshold is exceeded in the 2015-16 tax year, taxpayers should register with HMRC by 5 October 2016 to avoid potential penalties.
If you are not already in self assessment and your rental income is below the relief threshold, the rent-a-room relief applies automatically and it is not necessary to register. If you are registered for self assessment, any rental income must be reported on your annual tax return regardless of whether you qualify for rent-a-room relief.
"Rent-a-room relief generally applies to owner-occupiers and tenants who receive rent from letting furnished accommodation in their only or main home," says Stefanie Stapleton, partner at Blick Rothenberg. "The relief also applies where additional services are supplied, such as meals, cleaning and laundry, meaning the majority of hosts advertising on websites such as Airbnb should be able to claim the relief."
The property must continue to be your main residence throughout the let period. If, for example, you let your property for two weeks while you are on holiday the relief should be available. But if you spend that period at another property you own you may not qualify for the relief as HMRC may deem you to have acquired another main residence at that point, if only for a temporary period.
Rent-a-room relief does not apply to properties outside the UK.
An alternative for taxpayers is to declare all rental income and claim deductions for expenses incurred in the provision of the accommodation. HMRC advises that if you have made a loss it may be better for you to pay tax in the normal way - on your receipts less expenses. You will need to tell HMRC that you want to do this by 31 January following the end of the tax year.
