Thinking about letting out a room during the Olympics? Think again, warns Lucy Brennan

While the main concern of some people in the lead up to the Olympics is what tickets they have, others may be considering ways they can profit from the event.

With the large numbers of people expected to be visiting London and the surrounding counties, there will be a lot of people looking for accommodation, and the national news has already included pieces about individuals who are considering letting rooms, their houses or even garden spaces with tents to those that need somewhere to stay.

House arrest

However, those considering letting part or all of their property need to be fully aware of the tax implications of gaining an additional income from letting property. Many of these individuals may be receiving all of their income after it has been taxed at source and therefore do not at the moment have a requirement to file a tax return.

Therefore it is imperative that before starting the process to let out a property or a room, individuals obtain advice on their tax position. When looking at the costs of letting they will also need to consider the potential additional cost of filing an income tax return for the first time as well as remembering to save for any tax due on the letting income.

In calculating the tax that is potentially payable there are some reliefs and deductions that can be claimed.

Where an entire property is let out, money spent on decorating, advertising and legal and financial services (such as agent’s fees) may be available for deduction. In addition, mortgage interest may be offsetable against the income. If the property is let fully furnished there will be a wear-and-tear allowance that will be available for deduction.

Where owners are renting out their primary residence they should be aware that this can have potential effects on their capital gains tax relief on sale of the property. Any period of letting out of the property during the period of ownership will require the gain to be apportioned between the occupation (and deemed occupation) period and the letting period.

There is letting relief available as deduction against that gain, with the maximum level of relief being £40,000. Therefore, while this may not have an impact on the letting of a property during the games, it has been mentioned here should longer term letting be considered later.

Breakfast club

In addition, where a room is let while the owner remains in the property, there is ‘rent a room relief’ which gives the first £4,250 of income tax free. However, this is solely applicable where a room is let with no additional services. If one provides a breakfast, or dinner and breakfast, one is trading and all income is fully taxable (less of course the costs of providing the service).

Once the tax position has been ascertained, the individual needs to contact HMRC by 5 October after the tax year in which they receive the income to advise that they have additional income and will need to file an income tax return.

For example, if renting a property for the Olympics in July 2012 the tax year the income falls in is to 5 April 2013 and notification to HMRC of the income will need to be by 5 October 2013. Any tax payable as a result is due on 31 January after the tax year, so 31 January 2014 for the Olympic year. It is also likely that even though this is a one-off additional form of income HMRC will then require a tax return to be completed in future years.

People may consider not filing a tax return as this is a ‘one off’. However, they should be aware that HMRC are very proficient at reviewing the press and web for individuals that are advertising goods, services and properties that appear to bring in an additional taxable income.

If they believe that an individual has not declared income they can launch an enquiry into that individual’s tax affairs. Although this may be the only area in which income has not been declared defending such an enquiry can be very costly in addition to the interest and penalty charges that will arise.

Finally, one should not forget the practical aspects to consider such as insurance and informing a mortgage company that the property has been let out. It may be that permission is required from a mortgagee before the property can be let.

Those looking to benefit from the arrival of the Olympics should therefore consider the full costs and consequences of doing so before advertising their property for rent.

Lucy Brennan is a partner in the private wealth team at accountancy firm Saffery Champness