The short-term letting market is thriving and appears to offer more potential tax breaks than the buy-to-let sector. There are, however, a number of tax issues to be considered.
Firstly, let’s look at how the government taxes revenue from short-term lets: HMRC will see the revenue as an income and it will therefore be liable for income tax. We see this as a potential 'win'.
If the host lives in the furnished property they rent out, they may fall under the government’s Rent-A-Room scheme. The hosts can take up to £7,500 in rental payments without paying Income Tax.
Last year, whilst he was Chancellor, Phillip Hammond consulted on a tightening of the rules around the Rent-A-Room scheme. In particular to ensure that lettings relief is only given to owners who remain in shared occupancy with the tenant. But his plans for a draft bill to be published in the summer of 2019 have not materialised. A packed Brexit agenda may be to blame?
If the host does not live in the rented property, all is not lost. The home could qualify as a Furnished Holiday Letting (FHL). The property must be available for rent for 210 days a year and must be let for half that time.
The property should be furnished and located in the UK or EU. If it is in Greater London, all appropriate planning permissions must be in place.
The FHL scheme offers numerous potential Capital Gains Tax (CGT) advantages, including the possibility of:
• Entrepreneurs’ Relief reducing CGT from 28% to 10%.
• Deferred liability following the property sale.
• Larger tax-free pension contributions.
• £1k tax-free property allowance.
As can be seen, there are a number of potential tax benefits in the short-term lets market and we would be delighted to help you explore this area further.
Please remember that this article is for general guidance and should not be treated as tax advice. We recommend you always seek independent tax advice to guide our decision-making.