Legislation and tax law can often be a slow-moving animal. Often events or trends can happen and become even quite commonplace before the government tax rules catch up and realise that the latest activity requires slightly different tax treatment or a clarification of the rules
And so it is with Air BnB or the very short-term letting of your home.
The short-term period of letting of your home has long been an annual event for those living around regular national events such as Wimbledon. Often owners would let their entire property for those two weeks while the owners take an annual two-week break to avoid the Murray-mania (other players are available). Sometimes the rent that they receive for those two weeks pays for the owners’ holiday completely. In recent years, some forms of Air BnB can use a variation of that idea whereby holiday makers can stay at an individual’s home whilst they themselves are away.
Up until now, HMRC have (grudgingly) allowed sundry rental of this nature from your home under the “Rent-A-Room” scheme which gives an allowance of £7,500 per home (not per person – a married couple receives one allowance between them) against rental income from individuals. But this allowance is primarily aimed at longer-term lodgers rather than ad hoc letting income that is more akin to holiday rental activities.
As the current practice strays from the original intention of the legislation, HMRC are proposing that Rent-A-Room relief will only be available for periods where the occupation of any “sleeping accommodation” overlaps (partly or wholly) with the period of letting. In other words, you will have to be present for a least part of the time that your “guests” are there to claim Rent-A-Room. The length of time that you both have to be present has yet to be defined but will certainly extend to longer than an hour or so whilst you hand over the keys and show your guests how the boiler works.
To allow occasional use of this nature, there is now the Property Allowance which can be claimed instead. This relief allows sundry rental income to be received of up to £1,000 each year but it should be noted that you cannot claim both Rent-a-Room and the Property Allowance in the same year.
For example, Tom, Dick and Harry each let properties under Air BnB. Tom allows guests to use his entire house whilst he is away and receives £4,000 in total in the tax year. Tom is always away before his guests arrive. Under the new proposals, Tom will only be able to claim the £1,000 property allowance and has taxable income of £3,000. Dick never goes on holiday and lets his guests stay in his two spare bedrooms. Dick receives the same rental income as Tom but will be able to continue to claim the Rent-a-Room relief of £7,500 and therefore pays no tax on his income. Harry is sometimes present and sometimes is away when his guests stay. Under the new rules, he will need to split his rental income each year between the guests for whom he was present and for those he was not. Harry can then either claim the property allowance of £1,000 against all his rental income, or the Rent-a-Room relief against those guests for whom he was present (and the remainder is taxable).
The main targets for this rule change would appear to be those who, for example, work in the city but return to the country allowing their city pied-a-terre to be used by an Air BnB’er at the weekend, or those at the high-profile sporting events who have an expensive paid holiday on their guests each year.
Whilst this rule change is not yet in force (HMRC’s originally proposed introduction date of 6 April 2019 having been postponed), this restriction is still an intention and will be returned to once HMRC has finished working on other more immediate matters (did anyone say Brexit?).