Whilst Airbnb offers property owners a great opportunity to rent out a spare room without the long term commitment, it has also become a good way to let out a holiday home during the periods that are traditionally quiet for much of the year.
Both of the above are really good ways to generate additional income, however some Airbnb hosts may not realise the effect that this has on their tax position.
As a result of the increasing popularity of Airbnb, we are getting more and more questions regarding the tax implications of receiving this income. With this in mind, here are some frequently asked questions.
Do I need to pay tax on my Airbnb income?
Income generated from Airbnb is treated in the same as any other property income and is therefore taxable.
The tax treatment and reliefs available will depend on whether the property is your main residence or not.
Renting a room in your main residence
If you rent out a room in the property that you are living in, you could qualify for rent-a-room relief. This means you will get a tax free allowance of £7,500 per year.
You could also qualify for rent-a-room relief even if you are running a bed & breakfast or guest house - as long as it is within your main residence where you are living at the time.
As a result of the above, most Airbnb landlords will qualify for rent-a-room relief for letting rooms within their main residence.
However, landlords will not qualify for rent-a-room in the following scenarios:
- If the accommodation is not within your main residence where you live
- If the property is unfurnished
- If the letting is for business use (e.g. for office)
The tax-free allowance of £7,500 is not an allowance on profits – it's an allowance on gross rent receipts. That means total receipts before deducting any expenses. If your gross rent receipts are less than £7,500 in a tax year, you don't need to declare this on a tax return as the income is automatically exempt.
Although care does need to be taken due to the fact that the limit will reduce to £3,750 if two people receive the income from the same property. This can happen where the property is owned jointly and both receive income from it.
What happens if your income exceeds £7,500?
If the gross rental receipts are more than £7,500, you have two options:
Calculate rental profits in the standard way, ie deducting all allowable expenses from the gross rental receipts and pay tax on the net rental profits.
For example, if your total rental income in a tax year is £12,000 and you incurred total expenses (cleaning, electricity, repairs, etc.) of £5,000 for the area you let, your rental profits will be £7,000 (£12,000 income less £5,000 expenses), and you will pay tax on this profit.
Don't deduct any allowable expenses, but instead claim the £7,500 tax-free allowance. If you select this option, you are not allowed to deduct any expenses.
You may be better off with Option 2 if your total expenses are less than £7,500 in the year. You can switch between the options each year as you may be better off with option 1 in one tax year while option 2 would be better in another tax year.
Renting out a separate property
If you are using Airbnb to rent out a separate house/flat (i.e. not within your main residence), you will not qualify for the rent-a-room relief and you will be taxed on your rental profits like any other rental property.
Will using Airbnb make my property qualify as a Furnished Holiday Letting (FHL)?
If you own a property which you let via Airbnb throughout the year, then it will most likely qualify as a Furnished Holiday Let.
To be eligible as a Furnished Holiday Letting, you need to fulfil all of the following conditions:
- The property must be available for letting as furnished holiday accommodation for at least 210 days in a tax year (or during the relevant 12 month period)
- The property should be actually let for at least 105 days in the year
- The property should not be occupied by long-term tenants, classed as those who stay longer than 31 days
- The property needs to be furnished (i.e. property must have sufficient furniture for usual occupation)
- The property must be situated in the UK or the European Economic Area (EEA).
With the above in mind, it is likely that most of the properties being let out through Airbnb will qualify as Furnished Holiday Lettings.
There are significant advantages if a property qualifies as an FHL. These are explained below.
Will the restriction on tax relief on interest apply to Airbnb?
The good news is many Airbnb landlords will escape the interest relief restriction because the property will qualify as a Furnished Holiday Let.
However, if your property is not eligible as an FHL, the restriction will apply, and this means you will not be able to claim full relief on mortgage interest if you are a higher rate tax payer.
Do I need to charge VAT on Airbnb letting?
This is one of the very important distinctions between normal letting and Airbnb letting. Generally residential rental income is exempt from VAT. However, Airbnb is deemed to be similar to hotels rather than typical residential letting. It is because of this that Airbnb falls within the definition of holiday accommodation and is therefore standard rated for VAT.
This means you will need to charge VAT at 20% on the rent that you charge your lodger.
However, you will not need to worry about VAT if your total income does not exceed the VAT registration threshold which is currently £85,000. Although, if your income exceeds the threshold, you will need to register for VAT and file regular VAT returns to HMRC.