Beware of Hidden Taxes When Letting Out Your Property
Homeowners hoping to join a boom in letting out their properties online are at risk of being hit with huge fines, a tax investigation and even having their mortgages revoked.
Tens of thousands of property owners are signing up to websites that let them make extra cash by renting out a room or their whole home to tourists for a day.
This is done through new websites, such as Airbnb and HouseTrip, which act as middlemen between homeowners and travellers.
It has proved such a success that the number of properties being put up for rent on Airbnb has increased by 66 per cent in the past year.
There are an estimated 60,000 spare bedrooms, granny flats and holiday homes in places from Newcastle to Newquay for rent, as well as many more overseas.
But experts fear owners have no idea that renting out their homes like this can put them in peril of having their mortgage revoked and their home insurance cancelled, as well as being hit with a huge tax bill and even an investigation.
That’s because short-term rents are against the terms and conditions of many mortgage and insurance contracts.
Vanessa Warwick, founder of rentals website Property Tribes says: ‘Many people do not realise that when they let out their home like this, they are turning their property into what is arguably a commercial business. There are going to be significant implications in terms of your lender, your insurer and your tax bill. It is a potential minefield.’
On the websites, owners can enter a brief description of their rooms or properties along with photographs. They can also choose a suggested rent – which typically will be a lot less than a holiday home or hotel room.
Anyone searching on the website can book a room. After they have chosen their accommodation they pay through the website with their credit or debit card. Once the payment has cleared, the holidaymaker is given the homeowner’s contact details, so they can arrange the final details of their stay.
The cash is held until a couple of days after the tourist arrives. The websites also usually take a cut of the cash from the host and the guest. The popularity of this kind of rental is booming.
Typical hosts are people in their 50s with large homes and families who have flown the nest. They are looking for extra ways of boosting their retirement income. An added attraction is that there is no obligation to make a room available to rent throughout the year, so someone in a popular holiday destination, such as Bournemouth, could offer a room during just the summer months.
A three-night stay in a smart, one-bedroom flat in Liverpool advertised on website HouseTrip typically costs £404. A modest four-bedroom house in Staffordshire advertising on Airbnb costs £100 a day.
But lucrative though these rents may be, they are also riddled with pitfalls. Experts fear that some owners do not realise they must tell their mortgage lender or insurer what they are doing.
Lenders tend to be forgiving about owners who rent out rooms, provided they are still living in the property. This is because they know the homeowner can keep an eye on the tenants. They’re tougher on those who rent out their entire property, for example, over a weekend or when they go on holiday.
There can also be restrictions on the total number of weeks you rent out your home. Some may give you permission to let it for longer, but will demand you pay extra for the privilege.
Those with second homes bought with buy-to-let mortgages are generally barred from letting out their homes to holidaymakers.
Ray Boulger, senior technical manager at broker John Charcol, says: ‘Some lenders do background checks from time to time.
‘As technology improves, it’s not difficult to envisage some kind of computer program being devised that will tell banks whether one of their customers is advertising on these sites.’
If you fail to tell your home insurer that you are renting out your home, then any claims could be turned down. This is because some insurers view allowing a stranger to stay in your home as increasing the risk of fire and theft.
A further threat comes from the taxman. Some homeowners may not realise tax is payable on their profits for holiday rentals. The Government allows people who rent out a room to a lodger to earn £4,250 tax-free.
Though there is no explicit guidance, officials at HM Revenue & Customs (HMRC) may not allow rental income from tourists to qualify for this perk. As a result, all income after costs from the rental would be taxable at the homeowner’s normal rate. And they would have to fill out a self-assessment tax return.
Elaine Clark, managing director of accountancy firm Cheap Accounting, says: ‘I think HMRC could argue that if you used such sites you are, in fact, carrying on a trade.
‘Someone would need to be careful about using the scheme if they had numerous lodgers.’
Airbnb has a guarantee that it will pay out if a visitor damages your property. However, this is not the same as insurance. There are also a number of exclusions, for instance, cash and jewellery is not covered. And homeowners are often not covered by their insurance policies if a guest is hurt in an accident – for example, if they fall down a rickety flight of stairs.
A spokesman for HouseTrip says that the website advises customers to check with their insurance and mortgage company before signing up.
A spokesman for Airbnb says the firm has a warning on its website that property owners should take responsibility to check whether their homes can be let out.
‘We recommend that our hosts consult the terms of their mortgages or any leasehold agreements before signing up,’ he says.