Tax traps for Londoners renting over Christmas

Homeowners in central London could earn more than the cost of Christmas through renting in December, but there are tax risks for exceeding the rent a room scheme thresholds

By short letting their homes over the festive period, when demand for accommodation in the capital is high, Londoners could offset the average £868 cost of Christmas.

The average nightly rate for holiday rentals in London this December is £151, with an average length of stay of 6.5 nights producing an average gross income of £981.50 per property, reveals data from debit card company Switch.

Based on a weekly rental of £1,670.50 and full occupancy over four weeks in December, a homeowner in Westminster could earn £6,682, which would be within the Rent a Room (RAR) scheme that offers £7,500 per year tax free.

Homes in Westminster are the most popular for short lets with an average nightly rate of £257 likely to be achieved this December with gross earnings of £1,670.50.

The central locations of Camden and Westminster are close runners-up with an average rate of £243 and a gross profit of £1,579.50.

Some of the cheapest places to rent are in the Earls Court and King’s Cross areas with an average rate of £140 per night.

Tax liability

There are a number of tax issues to consider, such as the property income allowance, which came into effect in April 2017 year, giving the property owner £1,000 of tax relief on their rental income, provided they have few or no expenses.

The allowance does not apply to partnership income from carrying on a trade, profession or property business in partnership. They cannot be used in conjunction with the relief available under the RAR rules.

The RAR lets renters earn up to a threshold of £7,500 per year tax-free from letting properties. This figure is halved if you share the income with your partner or someone else.

For the scheme to apply, the property musty be furnished, UK residence and the only or main residence for all or part of the income period. RaR relief might not apply if you are going abroad for work, even if only temporarily.

To qualify for RAR the property does not have to be owned, a rented property can meet the requirement.

Emma Rawson, technical officer at the Association of Taxation Technicians (ATT) said: ‘RaR relief applies to both whole house and single room rentals. It was previously announced that whole house rentals would be denied RaR relief.  However, following consultation the proposal was dropped and the whole house restriction instead applied to capital gains tax principal private residence (PPR) relief.

‘If your gross rents are equal to or less than your RaR limit then there is no tax to pay. This exemption applies automatically, and you won’t have to file a tax return (unless already required to for other reasons). Alternatively, you can elect to be taxed on your rental profit under normal principles – this is normally only worthwhile if you have expenses which would tip you into a loss.’

Stefanie Tremain, private client director at Blick Rothenberg said: 'The main pitfalls from a tax perspective are to be aware of the potential need to report your income to HMRC and the reporting requirement will depend on your individual circumstances.  This is not so much of an issue if you already file Self Assessment tax returns.

If taxpayers need to file a return they should tell HMRC by 5 October following the end of the relevant tax year, so by 5 October 2020 for rental income received in December 2019.'

Switch applied the average length of stay of 6.5 nights to show how much homeowners were earning from renting their properties through Airbnb, Booking.com, VRBO and similar platforms.

December is the fourth most popular month of the year based on the volume of room nights booked.

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