Tax on Airbnb Income
What are the tax implications of letting your property within your main residence and what if you let another property where you don’t live? Are you entitled for rent-a-room scheme in a rented property? How will that affect you taxes, deductions and other finances? How we benefit maximum from this is what we all want to know and tax on Airbnb income in the UK is one amongst many that bothers.
In the recent years, Airbnb hosting has gained immense popularity with increasing number of landlords in and outside London have started using Airbnb as a platform to let their property, let another property and own house. This popularity has made influenced people to have detailed guidelines about tax on Airbnb hosting income. Here, the main tax provisions applicable to Airbnb income will be outlined.
Paying tax on Airbnb income?
In the UK, this is conditional on some reliefs and Airbnb hosting earnings are similar to other taxable incomes in the country. The tax implications and relief on it is based on whether the property is your main residence where you live or not.
- Renting buy-to-let property, another property which is not your main residence.
- You rent one or more furnished rooms in your main residence (where you live)
Rent-a-room Scheme – within your main residence
You qualify for rent-a-room Scheme, when you rent out a furnished room within the main residence where you live. The outcome of this will be, you will be entitled for tax free allowance of £7,500 every year. You can claim for this allowance through this scheme even if the residence is not your own property. Additionally, you will also be entitled for this scheme even if you are running a guest house or bed and breakfast option as it is within the main property you are living and which is well furnished. Therefore, almost all the Airbnb landlords will be entitled for rent-a-room scheme for letting their main property.
Below mentioned are the reason where you will not be entitled for Rent-a-room Scheme:
- If the accommodation that you rent out is not within your main property where you live
- The property rented out is not furnished
- If you have a business motive behind letting the property (e.g. for your office/business)
The tax-free allowance of £7,500 that you are entitled for after renting out a room is not an allowance on profits you make. It is the payment on gross rent receipts, which is the total bills before remove any cost. If this total rent bills draw less than £7,500 in a financial year, then you are not required to even declare it in your tax return as the earning is let off automatically.
Moreover, you should be aware that, if two persons are getting the benefit from the same property, the limit will come down to £3,750. That is, both you and your spouse will get allowance of only £3,750 instead of £7,500, if you are receiving earning from the same property.
What if your income exceeds £7,500?
You will have two options if your total rental receipts are more than £7,500:
After deducting all permissible costs from the total rental receipts you calculate the profits from the rental, which is the standard way of calculating. Whatever net rental profit you get, you pay tax on that. This is how it works, assume you earn £15,000 total rental in a financial year and the total expenses that you incurred (in meals, cleaning, electricity, etc.) is £8,000 for the space in your property that you let. So, the profit you earn from the rental will be £7,000 (i.e. £15,000 income minus £8,000 permissible expenses), and from this profit you will pay tax for the tax year.
You simply claim £7,500 tax-free allowance without deducting any permissible expenses. You will not be allowed to deduct any expenses if you opt for this option. If your total costs of expenses are less than £7,500, the, Option 2 will be favourable for you, else, Option 1 would be better. You also have the privilege of switching between these options alternate year, if you wish to. Thus, if one year you opt for Option 1 the very next year you can opt for Option 2.
Airbnb Income in buy-to-let property
You will not be entitled for the rent-a-room scheme, if the house/flat you let for hosting your Airbnb guests is separate from the main house/residence you live in or does not fall within you main residence. Unfortunately, in this circumstance, you will not be entitled for a tax-free allowance of £7,500.
In these types of situations, you will have to pay tax on your profits from the rentals, which would be similar to any other business. Let say, assume in a financial year your total rental receipts are £15,000, and you brought upon yourself a total permissible expenses (such as insurance, gas, electricity, maintenance, repairs, etc.) of £5,000, then the profits that you will earn from your rental is £10,000, and you will be liable to pay tax on £10,000 (i.e. £15,000 less £5,000) basis the income tax rate slab you fall into.
All in all, be informed, if you are not entitled for Furnished Holiday Lettings as described below, you will incur severe limits of deduction of interest as a cost from the financial year 2017-2018.
How Airbnb Hosting affects ‘Furnished Holiday Letting’ under UK tax law?
You will be entitled for Furnished Holiday Letting (FHL), if you have a buy-to-let property which you have decided to let through Airbnb all through the tax year.You will have to fulfil following conditions to qualify for Furnished Holiday Letting:
- The property that you decided to let must be vacant or available for letting as accommodation for Furnished Holiday for minimum 210 days in a single financial year (or the 12 months period when it be relevant )
- The property has to be legitimately let for 105 days minimum in the financial year
- The buy-to-let property should be well furnished with sufficient furniture for day to day functioning.
- The property has to be within the UK or the European Economic Area (EEA)
Thus, almost all the Airbnb Hosting buy-to-let properties will be entitled for Furnished Holiday Lettings.
Here, the significant advantages of being qualified as FHL are explained:
Effect of Section 24 on Airbnb (restriction on tax relief on interest)
The most interesting and positive point is, many Airbnb landlords will be entitled for the Furnished Holiday Lettings and therefore will get away with the dreadful Section 24 interest claims restriction. Although, you should know, Section 24 will still apply on your property, if the property is not qualified for Furnished Holiday Letting. The Section 24 restriction means, if you belong to higher tax bracket then you will not be entitled to claim full relief on mortgage interest.
For most of the buy-to-let landlords, shifting to Airbnb from traditional long-term lettings may be considerably worthwhile drawing from additional income and reduced tax!
Extra reliefs from capital gains tax for Airbnb Landlords
Usually, the relief from tax is based on whether your property is entitled for business of ‘Furnished Holiday Letting’ or not. There are several capital gains tax relief available for the properties that are entitled for FHL:
Relief for Entrepreneurs:
You will become qualified for Entrepreneurs’ relief when you sell your Furnished Holiday Letting property. Also, instead of usual 28% for residential landlords with higher rates, the capital gains tax rate will stand at only 10%. Just imagine the amount you will save by paying 18% less in your capital gains.
However, a careful tax planning is a must hence advice from property tax experts is necessary to meet the various tax conditions to protect yourself from the possibility of loosing huge tax benefits. A property tax specialists or experts can assist you understand the crux of the matter.
Relief of Rollover
You might b able to postpone capital gains tax on the sale of your current property/residence, if you sell your current Airbnb property and buy a new Airbnb property. In this circumstance you will not be liable to pay tax. This relief is provided in almost all the Airbnb property that qualifies as Furnished Holiday Letting property.
But, similar to Entrepreneurs’ relief, you might have to meet various conditions in rollover relief too, thus it is advisable that you hire property tax experts to discuss tax planning beforehand you decided to sale.
More reliefs from Capital gains tax
Airbnb Landlords are eligible for many other reliefs like gift relief that are possibly made available. The availability of these reliefs is based on the personal or business needs and condition of a particular tax.
Other tax Benefits as an Airbnb landlord
Yes, Airbnb landlords are eligible for many benefits as compared to typical buy-to-let landlords if Furnished Holiday Letting conditions are met as explained above.
You can find some of those advantages here:
- Similar to any other self-employed earnings or business, profits from rentals are ¬dealt as ‘Earned Income’. A usual income from rental from a buy-to-let property will not be eligible for ‘Earned Income’. The most important benefit from this is you will be eligible to make a much bigger tax-free payment to the pension scheme. It depends on the ‘Earned Income’ what amount of contribution a taxpayer can make to the pension scheme. This does not include income from normal rental.
- The furniture, equipment and fixtures in the property can attract capital allowances. This is not made available for typical buy-to-let landlords.
- Business property relief for Inheritance tax could be made available based on the conditions that would apply.
Can VAT be charged on Airbnb letting?
Yes, VAT has to be charged. This is the most important difference between Airbnb letting and normal letting. The income from residential rentals is relieved from the VAT in the UK. Hence, instead of being classified as a typical buy-to-let residential letting, Airbnb is classified as hotels. Airbnb comes under the definition of holiday accommodation and so standard rated. Thus, VAT charges are applicable at 20% on the rent you charge your guest lodger.
However, you need not have to worry if your total earnings do not go beyond the VAT registration limit which stands at £85,000 for the financial year 2017-2018. But, you will have to register for VAT and file regular VAT returns to HMRC, if your earnings go beyond that limit. The revenue for VAT comprises the full payment you charged to the guest lodger (that includes meals, cleaning, rent, etc.)
You may get relief on a particular type of letting as VAT rules are quite detailed and complex. For example, you will need to take advice from experts where single letting is for more than 28 days, which can be claimed for exemption. Consulting with property tax specialist can help better advice on these matters. Experts can assist you in providing a complete VAT solution to Airbnb landlords including VAT registration, VAT returns filing and VAT advice. You can contact an expert in this field for clearing your doubts and reaching a profitable solution.
Point of Advice to Landlords in London
According to the Greater London Council (General Powers) Act 1973, planning permission is necessary for the use of residential property as temporary accommodation for sleeping that is for less than 90 uninterrupted nights is an alteration of use for all 32 regions of London. Although it is known now that the UK Government has left this in Deregulation Act 2015 untouched to encourage Airbnb type lettings. The new rule says you can let your property up to 90 days in a financial year without violating this regulation. The number of days for listing is automatically limited to 90 days by Airbnb. You can have more clarity on this regulation on the Airbnb website and UK Government website. The implication of tax on this is you will not be entitled for Furnished Holiday Letting (FHL) if you do not truly let your property for at least 105 days and this accommodation is not available for use for at least 210 days. Therefore, the crux of the matter is you should get planning permissions to qualify for Furnished Holiday Letting (FHL) and get all the tax benefits.
If you find all this very confusing or you are too busy to handle this on your own, it is always better to hire a professional who would be experts in this field.
Any questions? Schedule a call with one of our experts.