Everyone has now heard of the success of renting out your own home for short periods of time and benefiting from the income that arises. Online Travel Agents (OTA’s) such as Airbnb, Booking.com and VRBO to name a few are the most widely known platforms that are used.
How did this all start?
AirBNB was started by 2 guys, Joe Gebbia and Brian Chesky from San Francisco who wanted to rent out their spare room for a few nights. After having made some money, they found there was no platform to promote this amazing opportunity. This led them to develop a website AirBNB. The idea was to help individuals who had a spare room to rent out.
However, this created a completely new marketplace! Not only rooms were rented out but also apartments, houses even the odd castle too. They promoted the idea of having a home from home experience rather than a spending time in a dreary hotel.
Is it the right choice for you?
Before you even start thinking about renting out your apartment or house, there are several hurdles to overcome and what tax benefit that may or may not arise. Over the next few months, House of Luchini are going to present some interesting facts covering important regulations, how to prepare your property and some basic UK tax awareness.
TAX
Very often we are asked which is better from a tax point of view – Short Term Lets or Long Term Lets. Whilst we cannot provide you with tax advice and you should seek professional advice before committing yourself on this journey.
Let’s talk about Short Term Lets and Long Term Lets.
Short Term Lets
From a tax perspective, HMRC recognises Short Term Lets more commonly known as Holiday Lets if they conform to the following rules:
- Must be available for at least 210 per tax year roughly 30 weeks (pro-rata if part way through)
- The property must be rented out for 105 days of the 201 days
- Should not be let to the same guest for more than 31 days
- Should not have more than 155 days (22weeks) continuous occupation by the same guest.
Although these are thresholds, there are several reliefs available to the taxpayer if you do not meet these rules. Your tax accountant can advise you on those.
HRMC considers Holiday Lets as a trade which means that there are special allowances and reliefs which will come onto later.
Long Term Lets or known as Buy to Lets (BTL)
Long Term Lets also known as Assured Shorthold Tenancy (AST) is treated very differently to Holiday Lets. HMRC recognised this as Investment Income. How do you qualify?
- normally have a contract called a Tenancy Agreement which specifies the rights and conditions to the parties to the contract, namely the landlord and the tenant.
- It normally has a minimum term of 6 months although in practice most contracts are for 1 year.
- The property must confirm to a multitude of legislation such as Gas and Electrical certificates (House of Luchini will not take on properties that are not legally compliant in the same manner as AST)
- Deposits take must not be more that 6 weeks rent and insured with a government recognised scheme.
The tax treatment of investment income relating to properties is very different and examples of the tax treatment are as followed:
- Certain expenses are allowable for tax such as small repairs, service charges, insurance, management fees, etc
- Restricted Mortgage Interest relief – This is no longer fully allowable and is treated as a tax reducer to a maximum relief of 20% of the interest
- Can’t claim Capital Allowance for major purchases but there are reliefs available as long as the replacement is a like for like since the removal of the Wear and Tear allowance.
Let’s have a look at the benefits of Short Term Lets in relation to tax.
- Capital Allowances – If you are buying new beds, sofas, table etc you can claim capital allowance. You can even have tax relief for upgrading the fixtures and fittings to higher standard something you can’t with Buy To Lets. Potentially could mean charging higher rent for the high standards of finishings in the property!
- Mortgage Interest Relief – Under present tax rules, you can claim 100% relief. This means that you pay less tax than you would under Buy to Let
- Capital Gains Relief – Unfortunately, HMRC want to take some of the profit when you sell your property. The good news is being, there are number of reliefs that are available that you wouldn’t have from a BTL. Some of them are:
- Entrepreneurs Relief
- Business Asset Disposal and Reliefs
- Gift hold-over Relief
- Inheritance Tax Relief – Being a business/trade, Holiday Lets may qualify for Business Property Relief.
- Small Business Rate Relief – Again being a trade, the property would be subject to Business Rates. There are ways to claim Small Business Rate relief which may lead to no rates being charged.
There are probably more advantages to Short Term Lets over Buy to Let from a tax perspective. It would be unwise of us not to make you aware of one other consideration:
VAT – Because as it has been mentioned above, Holiday Lets are a business and are subject to VAT rules if the VAT threshold of £85,000 is exceeded. This will impact on the guest fees by increasing their cost by 20% being the standard rate of VAT. Our experience, that most landlords do not exceed this threshold unless they have more than two properties in the same legal entity.
In future releases of blogs, we shall cover in more detail the Allowances and Expenses that you may be able to claim.
We always advise for peace of mind that the better the planning at the start, it will limit any impact on the achieving the best from your investment. We always advise that you seek professional help especially using tax advisors who are specialist in Property Tax. If you need any help, contact us at hello@houseofluchini.host and we can point you in the right direction with no obligation.
