As Airbnb continues to grow in popularity, more and more property owners are switching from long lets to short lets to maximize their incomes. However, this shift must be accompanied by further education about recent UK tax policies, as there are differing regulations surrounding short lets and long lets.
Types of Properties
Because the money you earn from Airbnb hosting is considered income, it is taxable. However, it is important to note that not all rental income is taxed equally. Depending on your property, there are different policies if you are renting:
- A furnished accommodation to someone in your main residence (where you currently live)
- A Buy-to-Let property (separate house/flat)
Are You Renting Within Your Main Home?
If Property Type 1 describes your situation, there are two possible ways for you to save on tax. Be sure to thoroughly consider the consequences of each option, as you will only be able to use one of them.
Method 1: The Rent-a-Room Scheme
To qualify for the Rent-a-Room Scheme, you must meet the following conditions:
- The room is within your main residence
- The accommodation is furnished
- The letting is used solely for accommodation
If the above conditions are fulfilled, you are eligible to earn up to £7,500 without having to declare it to HM Revenue & Customs. As a result, you will only need to complete a tax return if you earn more than the threshold. This threshold amount is halved, however, if you share the income with another person.
Method 2: Deducting Expenses
HM Revenue & Customs allows you to deduct certain expenses such as mortgage interest before calculating how much tax you need to pay.
Are You Renting Buy-to-Let Properties?
If Property Type 2 describes your situation, you will have to pay taxes on your income like any other business. However, as of 6th April 2017, UK hosts on Airbnb will receive a £1,000 tax free allowance on their property income, in an effort to boost the number of "micro-entrepreneurs". Furthermore, if you are letting your property through Airbnb, you may qualify for additional benefits if you meet the requirements for a Furnished Holiday Letting.
What is a Furnished Holiday Letting?
To be considered as a Furnished Holiday Letting (FHL), your property must be:
- Available for letting for at least 210 days of the tax year
- Let for at least 105 days of the tax year
- Situated within the UK or the European Economic Area (includes Iceland, Liechtenstein and Norway)
- Commercially let (you must intend to make a profit)
Remember, a tax year runs from 6 April to 5 April.
As a result, most Airbnb Buy-to-Let properties will qualify as FHL. This means that you will not have to deal with the recent Section 24 interest relief restriction. Furthermore, any income generated from your FHL property can be used to make tax-advantaged pension contributions. You will also be able to kit out your property and claim capital allowances. In other words, the cost of furnishing your property can be deducted from your pre-tax profits.
While the benefits are phenomenal, there can sometimes be a lot of work in maintaining such properties, especially if you do not live near your rental. As a result, many landlords are turning to property management companies to take away the hassle of managing a holiday rental while maximizing occupancy and income.
What to Do Next?
If you are interested in exploring the power of short-letting on Airbnb, check out our free property income assessment tool. We aim to make short-term rentals as hassle-free as possible. Give us a call at +44 20 8050 2818 or email us at firstname.lastname@example.org to see how we can help you make the most out of your property!
While we do provide property management services for Airbnb, Booking.com, Home Away and other short let platforms, we do NOT provide any tax services. If you have any questions regarding your Airbnb income tax, you can reach out to Airbnb tax advisers such as Chiene+Tait or DNS.