Renting out your property when you’re not at home – otherwise known as a Furnished Holiday Let – is a great way to earn extra cash. But if you live in the United Kingdom, you need to be aware of tax rules.
Many hosts have learned the hard way when it comes to paying Airbnb income tax. It’s always better to be proactive with these things rather than risking tax penalties down the track – especially since there are tax benefits and tax-free allowances that can work to your advantage as a host.
Does my property qualify as a Furnished Holiday Let?
Before we dive into the details of Airbnb Income Tax, it’s important to define the term ‘Furnished Holiday Let’ so that you know where you stand. To qualify, your Airbnb must:
- Be available for letting on Airbnb for at least 210 days of the year
- Have a sufficient amount of furniture for everyday use
- Exist in the United Kingdom or European Economic Area (EEA)
- Be rented out as a commercial let to the public for at least 105 days per year.
If you qualify as an FHL, see our Tax Guide for Furnished Holiday Lettings.
Why do I have to pay Airbnb Income Tax?
You might have started your Airbnb as a bit of a hobby – a nice way to earn some extra money – but the reality is that being an Airbnb host is in essence like running a small business. This means that, just like any business owner, you are legally required to pay tax on the money you earn.
Everyone is entitled to earn a certain amount of money without paying tax. Currently, in the UK, you can earn up to £11,850 tax-free. That means that if you are a host who earns a small amount each month from renting out a room – and that amount over the course of the financial year does not exceed your personal allowance of £11,850 – you will not be required to pay tax on your Airbnb earnings.
If, however, your Airbnb revenue exceeds that amount – it’s your responsibility to declare that money and pay the relevant taxes.
“It pays to be pro-active with Airbnb tax rather than risking tax penalties down the track: there are tax benefits and tax-free allowances that can work to your advantage as a host.”
How much tax do I have to pay on my Airbnb?
The main thing that you need to understand when it comes to paying tax on our Airbnb income is that there’s a difference between renting out a room in your main residence and renting out a room in an investment property.
If your Airbnb business involves letting a room in your own home, there are several tax-free allowances and advantages that can be gained in relation to paying tax.
If you’re a host who is running an Airbnb business involving an investment property or a property you do not live at full-time, you will be taxed as a business owner.
Business rates on furnished holiday lets in the UK
Airbnb hosts who own properties in the United Kingdom may be subject to business rates.
In England, any property that is available for let for 140 days or more each year is classified as a self-catering property and is subject to business rates.
In Wales, any property that is available for let for 140 days or more each year and is actually let for 70 days is subject to business rates.
In Scotland, any property that is available for let for 140 days or more each year may be subject to business rates and it is advised that you contact a local assessor who will look at the property type, size and location to come up with a rateable value.
Owners of guest houses and B&Bs that cater to more than six people at a time could also be liable for business rates.
Who pays council tax on a holiday let?
When you are renting out your holiday home or investment property on Airbnb and it’s available to let for less than 140 days per year, you will need to pay council tax – not business rates.
Can I offset my letting losses against other income?
Unfortunately, the UK government no longer allows Airbnb hosts to offset their furnished holiday letting losses against other income.
This offset was possible up until April 2012 but the current system only allows you to offset your Airbnb income losses against future profits for the same property.
Don’t forget about VAT
Remember to consider the VAT threshold of £85,000. If your total Airbnb rental income exceeds this threshold, you will need to register for VAT.
You can choose to charge it directly to your guests (20 per cent on top of the rent), absorb the extra VAT cost yourself or compromise and split the extra cost by raising the nightly rate of your accommodation slightly.
The advantages of paying Airbnb tax
If your property qualifies as a Furnished Holiday Let you can benefit from the following:
- Profits can be counted as earnings for pension purposes
- Allowances can be claimed for fixtures, furniture and certain types of equipment in your home
- Capital Gains Tax relief programs such as the Entrepreneurs’ Relief or Business Asset Rollover Relief may apply.
Tax-free threshold for your Airbnb
As mentioned, any cash you earn from your Airbnb is considered part of your taxable income – which means that it could be subject to things like corporation tax, income tax, business rates and VAT. Of course, this will depend on the amount you earn each financial year.
In 2016, the UK government increased the tax-free threshold for furnished holiday lets to £7,500 as part of the Rent A Room Relief scheme. This threshold applies to renting out rooms in your primary residence. Different rules apply if your Airbnb is an investment property.
Micro-Entrepreneurs Allowance and Airbnb
The UK government also has a scheme aimed at supporting micro-entrepreneurs who are letting out properties or trading on websites such as Airbnb.
This scheme allows recipients to deduct a £1,000 Micro-Entrepreneurs Allowance against their gross income to arrive at their taxable rental income figure, as opposed to calculating and deducting the actual expenses they have incurred to arrive at their taxable profit.
It’s important to note that you can’t claim the Micro-Entrepreneurs Allowance as well as the Rent A Room Relief on the same income.
Capital Gains Relief Tax
Given the tax benefits on offer to Airbnb hosts who rent out a room in their main residence, you might be wondering if there’s any advantage in buying an investment property and turning it into an Airbnb. The good news is that if your property qualifies as a Furnished Holiday Let and if it’s not your main residence, you are entitled to capital gains tax relief. This may include:
- A 10% capital gains tax rate instead of 28% when you sell your property under the Entrepreneurs’ Relief scheme.
- The ability to defer capital gains tax on the sale of your initial property when you sell one Airbnb residence and buy another under the Rollover Relief scheme.
- The ability to avoid paying capital gains tax under the Gift Hold-Over Relief scheme involves owners giving away their business assets or selling them for less than they are worth in order to help the buyer.
- Access to capital allowances for property furniture and fittings.
Need help with your Airbnb?
There are loads of online resources that can help you figure out what needs to be done in relation to paying tax on your Airbnb. Here are a few that we recommend:
- UK Gov website – Self Assessment Tax Returns
- Airbnb – Guidance on the UK taxation of rental income
- Go Simple Tax Software – Self Assessment tool
Our GuestReady team in London, Manchester and Edinburgh will assist you to navigate your way through the complex topic of managing an Airbnb.
Give us a call at +44 (0)20 386 83 401 for a consultation today or send us a message through the form, for more information.