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Tax compliance and guidelines surrounding non-standard lettings are complex, but understanding them is essential for property owners and landlords. Tax planning for non-standard lettings, such as rent-a-room schemes, furnished holiday lets and Houses in Multiple Occupation (HMOs), can be complicated and would need to look at closely to maintain profits. At Tax Accountant, we ensure you have all the information you need to make the right choice for your circumstances.
Rent-a-Room Scheme
The UK government introduced the rent-a-room scheme to incentivise homeowners to rent out spare rooms in their homes. According to the HMRC’s guideline HS223 (2023), homeowners can earn up to £7,500 tax-free per year from letting furnished accommodation in their only or main home. This exemption is halved if you share the income with your partner or someone else. If you decide to use the scheme, you won’t be able to deduct expenses or capital allowances. However, you can opt out of it and deduct these costs while calculating your profit normally. The rent-a-room scheme does not apply if the property is not your main home, the home is converted into separate flats, or the accommodation is used for business purposes.
Furnished Holiday Lettings (FHL)
HMRC’s guidelines (HS253) define furnished holiday lettings as a specific type of rental property classification in the UK and the European Economic Area (EEA). They enjoy several tax advantages over standard residential lettings. These benefits include claiming Capital Allowances for items such as furniture, equipment, and fixtures and tax reliefs such as capital gains tax reliefs for traders (Business Asset Disposal Relief, Business Asset Rollover Relief, and Entrepreneurs’Entrepreneurs’ Relief).
To qualify as a Furnished Holiday Let, your property must meet several criteria:
- It must be located in the UK or EEA.
- It must be available for commercial letting to the public for at least 210 days per year.
- It must be commercially let for at least 105 days per year.
- It cannot be allowed for periods of longer-term occupation (more than 31 days) for more than 155 days per year.
FHLs are not eligible for the rent-a-room relief, and it’s essential to keep accurate records to meet HMRC’sHMRC’s conditions.
Houses in Multiple Occupation (HMO)
Houses in Multiple Occupations (HMOs) represent a unique category in the UK property market. They can often generate a higher yield than traditional rental properties but also have unique tax considerations.
From a tax perspective, the income generated from an HMO is treated similarly to other rental income. It’sIt’s subject to Income Tax, which must be declared on your Self Assessment tax return. However, the expenses you can claim against an HMO can differ. These include mortgage interest, utility bills, Council Tax, property repairs and maintenance, and costs incurred while managing the property. One key thing to note is that landlords of HMOs may be able to claim capital allowances on the cost of providing certain shared facilities for tenants, such as furniture or appliances in shared areas of the property, subject to HMRC’s guidelines (CA223). HMO landlords also have additional responsibilities to ensure their property meets safety standards set by the local authority, which can incur further costs. Moreover, certain HMOs must be licenced, adding to the administrative and financial burden.
Other Non-Standard Lettings
Apart from these key categories, there are other non-standard lettings with their tax considerations.
Serviced Apartments
Serviced apartments can provide a significant income but carry specific tax implications. While HMRC does not have a distinct category for serviced apartments, they might be treated as a trade rather than a property rental business for tax purposes if significant services are provided, such as cleaning, laundry, or meals. This can impact the kind of tax relief you can claim, as you may be eligible for allowances related to trading businesses.
Renting property as a Limited Company
Increasingly, landlords are choosing to operate their property portfolios through a limited company structure due to changes in mortgage interest relief. Rental income earned through a company is liable for Corporation Tax instead of Income Tax, and landlords can pay themselves dividends, which may have tax advantages. However, additional costs and complexities are also associated with running a company.
Regardless of the non-standard letting you operate, it’sit’s crucial to keep accurate records and consult a tax professional or an accountant familiar with property tax law to ensure you meet all your tax obligations and can claim all applicable deductions and allowances.
Taxation can be complex, and your circumstances may need to fit more neatly into these categories. Understanding the tax implications of non-standard lettings can help you maximise your rental income, reduce your tax bill, and ensure compliance with UK tax laws. If you need help with your tax comliance call our specialist tax advisors.