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Renting out your property when you’re not at home, also known as a Furnished Holiday Let is a great way to earn extra cash. But you need to be aware of tax rules. This is often called AirBnb Tax.
This article is an updated version of previous article – “Airbnb / Short-stay holiday let tax: THE DEFINITIVE GUIDE” first published in Luxury BnB Magazine April 2020.
Many hosts have learnt the hard way when it comes to paying Airbnb income tax. It’s always better to be pro-active 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.
Airbnb UK host. For many, no income tax may have been paid on that income as a result of a relief targeted at lodgers called ‘rent-a-room’ relief.
Rent-a-room relief allows for gross income of up to £7,500 a year to be received on a property that is the individual’s main home and the legislation does not currently include any requirements for the landlord to be living in the home at the time.
However, from 6 April 2019 rent-a-room relief is only available where the host also lives in the property at some point during the rental period. That’s an added extra which many guests want to avoid if they are looking to rent the entire property.
The restriction on rent-a-room relief has been described by some as the ‘Airbnb tax’, but for many the platform still offers its hosts the opportunity to benefit from valuable tax reliefs and could drive more entrepreneurial behaviour as they seek to operate more like a business.
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 just like running a business. Therefore, just like any business, you are legally required to pay tax on the money you earn.
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 £12,570, 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.
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.
This will depend upon the length the property is available for let if it exceeds the maximum days each year then the property is classified as a self-catering property and is subject to business rates.
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.
REVISED OCTOBER 2021
Furnished Holiday Lettings allowable expenses
When it comes to expenses, your FHL property is treated similar to that of a business. This basically allows you to offset expenses against your revenue. Main points to consider are:
- Expenses claimed must be against commercial use only. If you, your family or friends use your property, your expense will be partly considered as ‘private use’. This means you will need to calculate what percentage of the expense is commercial. For example, if you use the property privately for 3 months of the year, 75% of your expenses will be considered as commercial.
- Expenses must not be capital. For example, one-off payments for the purchase or construction of the property, or for its fixtures, however capital allowances maybe available on these costs.
Examples of allowable expenses on Holiday Rental Properties:
- Utility bills
- Interest on loans associated with the property (Tax restrictions will apply to the interest) but not the capital element of the loan repayment.
- Management Letting fees
- Products bought for the property (cleaning products and welcome packs)
- Maintenance and cleaning
- Insurance for the FHL (e.g. public liability, buildings and contents insurance)
Can I offset my Airbnb Tax losses against other income?
Unfortunately, the UK government no longer allows Airbnb hosts to offset their furnished holiday letting losses against other income. You can only offset your Airbnb income losses against future profits for the same property.
Don’t forget about VAT on Holiday Lets
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.
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.
Does my property qualify as a Furnished Holiday Let?
It is 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 to be let out for at least 105 days a 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.
Capital Gains Relief Tax on Holiday Rentals
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 which 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.
What is the AirBNB 90 Day Rule?
The 90 Day Rule which was formerly called the Airbnb’s 90-Day Limit in London, is currently effective only in the city of Greater London. The 90 Day Rule is simply a rule that applies to property owners setting default limits on their entire space. Such property must be registered on Airbnb listings before the rule can be effective. Property owners are required by Airbnb to put a limit of 90 days of occupied nights per calendar year. It was introduced by Airbnb in January 2017, in the city of Greater London.
Airbnb has put a limit on the number of nights people (for lets) can occupy your apartment per year to 90. In other words, a property on Airbnb listing can’t be let out for more than 90 days of occupied nights per calendar year. Once the 90-day limit has been reached, bookings for your property will be automatically closed by Airbnb until the end of the year.
The 90 Day Rule does not apply to you if you are able to confirm that you have the necessary permit to rent your space for a longer period i.e. more than 90 Days on a consecutive let. However, anyone that does not satisfy the above condition and thereby go against the Airbnb rule may be penalized and pay a fee of £20,000.
The Airbnb’s 90 Day Rule was put into practice with the focus of legalizing short lets in London. To its effect, property owners were required to apply for planning permission so as to rent out their homes for vacation lets (a short time lets)
You can let for more than 90 Days, despite the warning by AirBnB, but it is advisable you get the Planning Permission. If otherwise, AirBnB may take an effect with removing your property from a long-term lets private-rented sector, and placing them into a short-term lets listings.
The Change of Use Planning Permission by AirBnB is just meant to support and guide homeowners so as not ta fall victims of the £20,000 fine that applies to anyone who rents a space for more than 90 days per year.
HMRC investigative spotlight
Landlords should realise that HMRC will know about their lettings through Airbnb, so full disclosure of all their taxable property income is essential, including for all prior years.
The Airbnb UK accounts for the year to 31 December 2019 include a statement that the company will share data with HMRC about the earnings of hosts (those who let out property) on its UK platform in the years 2017/18 and 2018/19.
The Airbnb data will allow HMRC to launch targeted enquiries into the tax affairs of individuals who have not declared their lettings income from the tax year 2017/18. The deadline for opening an enquiry into a self assessment return for 2019/20 is 31 January 2022, if the return was issued and submitted on time.
However, the discovery rules allow HMRC to go back much further, up to 20 years in some cases. The data provided by Airbnb will certainly constitute a discovery for HMRC’s purposes, so up to 20 years could be open for enquiry.
HMRC is reported as saying it will address any issues over the landlords’ payment of tax in 2021/22. This clearly indicates that HMRC expects to use its discovery powers to open up tax enquiries going back some years.
How to declare Holiday Rental Income
If the landlord hasn’t declared their rental income, and it is not covered by rent-a-room relief or the miscellaneous trading income allowance, this needs to be corrected.
Where the taxpayer has submitted a tax return, and it is still in date for amendment, it should be amended without delay.
Where the omitted property income or gain relates to earlier tax years the taxpayer should make a discloser to HMRC see the link below.
The advantage in using the let property campaign to disclose is that the penalties charged for non-disclosure will be much lower than if the taxpayer waits for HMRC to contact them. If full disclosure and payment of the tax is made before HMRC spots there is a problem, the penalty can be reduced to nil.
It is advisable to notify HMRC about any past income, rather than waiting for them to get in touch.
Penalties for inaccurate returns range for 15 to 100 per cent, depending on the severity of the omission.
If you are able to use the Rent-a-Room relief allowance of £7,500, which someone who uses the Airbnb service to let part of the home in which they live may be able to take advantage of. It would mean they would not generate a tax reporting obligation below this amount – but it should still be disclosed in their personal return.