Joining the holiday letting boom is simple, but tax must be taken into account

With summer around the corner, improved air links and lower prices for foreign visitors as a result of the weakening pound, demand is strong for visitor accommodation across the country.

Across the UK property owners have seen the earning potential in joining the holiday market. And there are benefits to the country too – recent research showed visitors who rent self-catering properties are bringing almost £300 million to the Scottish economy.

The study from the trade body representing the sector, the Association of Scotland’s Self-Caterers, also suggested 10,700 jobs are supported by self-catering tourism with a further 4,500 indirectly supported.

Those figures are just part of the story. They don’t reflect the many properties which are registered online with sites such as Airbnb. In Edinburgh alone, December figures for Airbnb show almost 3,400 properties listed.

To register accommodation for rent through a website such as Airbnb, or any online marketplace, is quick and easy. And at peak times there is money to be made, but have-a-go hosts really need to understand the tax facts before leaping to join the sharing economy.

Apart from being aware of the need to file a self-assessment tax return – and the risk of significant fines if you don’t – is the criteria that surrounds rental income. Like many issues related to tax, it can be complicated.

For a start, owners need to consider the form the rental income takes. Airbnb hosts have different options: rent a room, or rooms, or even a couch in your own home, or rent out a property as a whole. These will all be classed as furnished lets or furnished holiday lets (FHL).

A profit, whether on a furnished let or an FHL is taxable at 20, 40 or 45 per cent, depending on whether the host is a basic, higher or additional rate taxpayer. But there are various tax reliefs available.

Since April 2016, if you live in the property that’s being rented out, you are entitled to £7,500 tax-free income under the rent-a-room allowance. For a property to be considered an FHL it must be furnished, available for let for 210 days a year and let for at least 105 days of the year. And the property must not be let on a long period, which is more than 31 days.

If the property meets these criteria, the owners can claim capital allowances and there are certain capital gains tax reliefs available. The profits from an FHL count as ‘earned income’ for pension contribution purposes.

This summer homeowners may well be looking to take advantage of what seems like a simple and effective way to earn extra money.

When considering this, homeowners must ensure adequate insurance, good record keeping and take tax advice to ensure they are correctly declaring the income while getting full credit for allowable expenses and all available tax reliefs.

Lucy Crow is tax manager at chartered accountants Henderson Loggie