When is a hobby not a hobby (in the eyes of HMRC) and should I be completing a tax return?
We all have hobbies – well hopefully. Some of us paint, tend to our gardens, spend our Sunday’s cooking, or help our friends with an additional skill we may have learned for fun or to expand ourselves. Unless we are hit with a conscious urge to make a life changing decision, jack in our job, and turn our hobby into a self-employed business, we don’t think about having to complete a tax return.
Sometimes when we’re good at our hobby, our friends and family may ask us to furnish or supply them with the benefit of that skill or knowledge for a ‘drink’ or a small informal payment.
There are other kinds of income that might not fit the traditional idea of a hobby, but there are some activities that have become popular over recent years and people do not always realise that they should check whether they should be declaring any income from it to HMRC.
Since the famous day on 21st March 2020 when many were furloughed and confined to their homes without work, hobby activity has been on the rise.
Properties and Cryptocurrencies
As well as the traditional kind of hobby, there has been an explosion in property rentals – ‘income from land and property’. Property rental includes renting a room or rooms in your home, renting a self-contained home out for a family or individual to live in long term, renting as a furnished holiday let either in the UK or abroad or maybe renting a small storage area to a local business.
Furthermore, many people have become interested in cryptocurrency such as Bitcoin to the extent they have made significant financial gains – especially since March 2020 when many investments plummeted in value and have now recovered.
This blog can’t go into the complex tax issues relating to property rentals and cryptocurrency investing or trading but just seeks to raise awareness that what you may consider just ‘what you do in the evenings and weekends’ may be subject to ether income tax or capital gains tax.
HMRC do recognise hobbies and since 6th April 2017 when the £1,000 trading allowance was introduced, there has been no need to complete a tax return if the gross income in the tax year i.e., 6th April to 5th April does not exceed £1,000. This was mainly intended to cover such activities as eBay trading which had grown at the time.
There is a different £1,000 allowance for property income called the ‘Property Income Allowance’. So if your income from property doesn’t exceed the £1,000 mark, there is no need to complete a tax return. This does seem unlikely though and if you do have to do a tax return you can claim the £1,000 allowance instead of expenses.
I would be remiss if I didn’t mention the amazing £7,500 rent a room allowance at this stage. This applies if you are renting space in your home and the most important and simple test of eligibility is whether the tenants are using the same front door as you. If they are, then you are likely to be eligible to use the rent a room allowance. You also need to be aware that there could be capital gains tax consequences or renting space in your home.
Regarding Cryptocurrency, this quite often applies to very young people as they are so accomplished in computerised activities. Depending on the number and frequency of the transactions, the young individual may be deemed to be trading rather than investing and there are very different tax treatments depending on whether a ‘gain’ is made from the sale on an investment asset or whether an income is being derived from the activity.
Selling bits and bobs
Lastly, I should cover people that have been having a clear out in lockdown and may have sold some family heirlooms, a painting or sculpture that they never really liked. If you received more than £6,000 for the item, you may have to pay capital gains tax. Note the capital gains tax allowance of £12,300 in the current tax year to be used across all your gains.
Note you don’t have to have received money for a transaction to be subject to Capital Gains tax. If you give away an item, this could amount to a taxable event in which capital gains tax would be due.
Please always check with an accountant before entering any significant financial transaction or activity.