Taking in tenants for summer could mean a festival for taxman

TOURISTS and performers who rented out Edinburgh homes during the festival season have departed for another year, but for those letting out the properties there is still work to do.

Letting out homes, or part of them, during festival time has become increasingly popular as people bid to supplement their incomes. But what are the tax consequences of having done so, and how can you minimise them?

Individuals who temporarily let out their home, or a room at home, this summer during special events such as the festival and the Open golf tournament must ensure that they include the rental income received in their next income tax return or risk financial penalties from HM Revenue & Customs (HMRC), which may launch an inquiry to check the income has been properly declared.

HMRC has made no secret that it will be thorough in its pursuit of those who do not declare income from short-term lets of this type. Any undeclared income could come back to haunt homeowners and result in substantial interest and penalty charges.

UK and foreign holiday homes offering short-term summer lettings for the tourist season will also be scrutinised by HMRC, which often follows up letting adverts to make sure that the correct tax has been paid.

A distinction is made for tax purposes between those who own a buy-to-let property, those who simply rent out a room at home, and those who move out temporarily during annual events such as the Edinburgh Festival. Anyone in the final category can reduce the tax liability on the income received by claiming expenses against the rental income. Property owners should make sure that they are aware of the types of expenditure that can be offset against the tax due.

As a general rule, expenditure on property repairs is allowable against the rental income received, but not on property improvement. The dividing line between the two can be very thin and property owners should seek professional advice if they are in any doubt.

A proportion of the following outlays are likely to qualify for relief:

• Letting agent fees

• Legal and accountancy fees

• Advertising expenses

• Exterior and interior painting and decorating

• Mending broken windows

• Fair wear and tear

The situation is rather different and much less complicated where only a room is being let out while the family continues to reside in the remainder of the property.

In that case HMRC allows a flat rate deduction called rent-a-room relief, under which, currently, the first 4,250 of rental income received is not taxable.This allowance is in lieu of all expenses but it applies only if a room at home is being let out while the remainder of the home continues to be occupied by the family.

If you move out completely for a short period the rent-a-room relief will not apply and it will be necessary to prepare an income-and-expenditure statement along the same lines as for those who operate normal holiday home lettings.

The position is different again for those who allow a room to be used at home but who supply services, such as cooked breakfasts and dinners. In that case the rent-a-room relief does not apply as you are deemed to be conducting a business rather than simply allowing a room at home to be used, and in that case an income and expenditure account must be prepared and submitted to the Revenue with your appropriate tax return.

Any tax due will become payable on 31 January following the tax year in which the letting took place so if you have let out your property or a part of it this summer and have made a profit it should be declared in your tax return to 5 April 2011 and the tax payable will be due on 31 January 2012.

• Ronnie Ludwig is a partner at Saffery Champness chartered accountants in Edinburgh