The arrival of online platforms such as Airbnb created a whole new market for short-term lets and many people made extra money on the side by letting rooms in their homes or in other properties they owned. However this useful source of extra cash is in fact taxable income.
So what are the rules governing tax and Airbnb lets?
As an Airbnb host you are running a small business and if you already have an income that is above your annual personal tax-free allowance of £12,570 you must pay income tax on earnings from letting rooms or property.
However, there is a big difference between letting a room in your home and letting a property that you do not live in because of the government’s rent a room scheme.
Rent a room scheme
This allows you to make £7,500 a year tax free from letting furnished accommodation in your home. If you share the income with someone else, say a partner or spouse, this allowance is halved.
The rent a room tax exemption is automatic so if your earnings on the room are less than £7,500 you do not need to do anything. If they are above this sum you must submit a tax return detailing your income from the room. It is up to you how much of your home you let out; the tax relief is not restricted to a single room.
You can’t use the rent a room scheme for letting out flats in your home – the rented space must be in your own home. Also you do not need to own the property and you can use the scheme if you run a bed and breakfast although you cannot claim multiple reliefs if you let more than one room.
You can’t use the scheme if the property is not furnished or if it is used as a business; however, the lodger is allowed to work there during the evening and at weekends.
Furnished holiday lets
Your Airbnb business will be classed as a furnished holiday let (FHL) by HMRC if:
- It is available on Airbnb for more than 210 days a year;
- It is furnished;
- It is in the UK or the EEA;
- It is rented as a commercial let to the public for at least 105 days a year.
In England (the rules are different in Scotland and Wales) any property that is available for 140 days or more and is self-catering is liable for business rates.
If it is available for less than 140 days a year the property is instead liable for council tax.
You are able to offset Airbnb income tax losses on FHL against future profits on the property.
Annual income of more than £85,000 mean that you have to register for VAT. This means charging guests an extra 20% in VAT or absorbing it yourself or splitting it between yourself and the guest.
If your property is a furnished holiday let, your profits can be counted as earnings for pension purposes. You can also claim allowances for fixtures, furniture and some equipment. You may also be able to apply for capital gains tax relief programmes, such as entrepreneurs’ relief or business asset rollover relief.
In addition you will qualify for the micro-entrepreneur’s allowance of £1,000 a year, which you can deduct from your Airbnb taxable earnings. This is essentially a rebranding of the trading allowance of £1,000 available to all small business owners and sole traders, meaning you cannot of course claim both. You also can’t claim micro-entrepreneurs allowance and rent a room relief against the same income.
You can’t use the £1,000 allowance to create a loss to set off against other income if say you operated the Airbnb business for only a small part of the year and its costs were greater than its income.
Capital gains tax relief
A furnished holiday let that is not your main residence entitles you to capital gains tax (CGT) relief. This means you could be eligible for:
- A 10% CGT rate instead of the normal 28% when you sell the property under the entrepreneurs’ relief scheme;
- If you sell one property and buy another you should qualify for rollover relief, which defers the CGT payable on the sold property;
- Capital allowances for furniture and fittings for the property.
How much tax do have to I pay?
Your income from your Airbnb business is no different from income from a job and should be included in your tax return along with all your other income. The current UK allowances are income up to £12,570 is tax free, with the micro-entrepreneur’s allowance of £1,000 available on top of this.
On earnings between £12,571 and £50,270 basic rate tax of 20% is paid.
The higher rate of 40% is payable on earnings of between £50,271 and £125,140 and the addition rate of 45% is payable on earnings above £125,140. Anyone earning a median salary (£33,000 in 2022) would start paying 40% income tax on Airbnb earnings of above £17,271.
Paying higher rate tax has a significant effect on net profits, and may even make you question if running your Airbnb business is worthwhile, given the work involved can be time-consuming, in particular dealing with enquiries and taking care of the laundry, which if contracted out also makes a big dent in profits.
Get Professional Advice
To maximise your profits on your Airbnb business and, just as importantly, to make sure your self assessment return is compliant with HMRC rules, please give one of our friendly team a call on 0208 858 4303 or email us at info@finsburyrobinson.co.uk
