Paying tax on UK Airbnb income

Renting your property on Airbnb has become an excellent way for many property owners and landlords to earn extra cash. If you live in the UK, a short-term property let (more commonly known as a Furnished Holiday Lets (FHL), has some great tax benefits, but you also need to be aware of them and pay tax on your Airbnb income correctly.

It is always better to be on top of your tax matters so that you do not risk tax penalties somewhere down the line, especially when tax benefits and allowances can work to your advantage as a host.

It is an intelligent way of bringing in extra income, mainly thanks to the rapid rise of Airbnb and favourable buy-to-let tax rules.

Who is Airbnb?

Airbnb began life in 2008 when two designers who had space to share came up with the novel idea of offering three travellers a place to stay. Now, after more than a decade, millions of hosts can create a free Airbnb account to list their space for travellers to book unique accommodation from anywhere in the world!

You can list your entire home or a room in a B&B – or perhaps have a unique space to offer, with the option to 'meet and greet' your guest on arrival or offer a more flexible and hassle-free self-check-in process.

These are the three different ways to host:

1. A co-host is a place to stay for someone you have a personal connection with, i.e., a family member, neighbour, or friend.
2. Work together with professional hosts to manage a group of listings.
3. You can even consider offering your space for free to people in desperate need of temporary housing, like a refuge or a family fleeing conflict.

The benefits of Airbnb

One of the significant advantages of short-term letting is flexibility. This allows you to regularly maintain and renovate your property in between your bookings or have the luxury of getting away from everything and spending time there yourself.

If your property is in a desirable location, setting up as an Airbnb host, could be very lucrative as there is the potential to charge higher rates than you would if you were just renting it out.

Does my property qualify as a Furnished Holiday Let (FHL)?

An FHL is a property rented out on a short-term basis (most commonly to tourists or holidaymakers), i.e., let for less than 31 consecutive days can be classified as a Furnished Holiday Let (FHL).

Millions flock to holiday lets each year, so there are fantastic yield opportunities and tax reliefs for an investor. In addition, there are many benefits for properties that qualify as an FHL compared to properties that are rented out on a residential basis on a long-term basis.

To qualify as a Furnished Holiday letting property, several conditions must be met, such as:

Location: Must be situated in the UK or in the European Economic Area (EEA).

Availability: Available for commercial lettings as holiday accommodation to the public for at least 210 days (30 weeks) of the tax year.

Letting: Appear on the Airbnb website and be available for a minimum of 210 days, or the property must be let out for at least 105 (15 weeks) days as holiday accommodation

When can I use the ‘Rent a Room’ scheme?

The Rent a Room scheme, through Airbnb hosting, allows owner-occupiers and tenants to receive tax-free rental income; if you rent out a room within the property, you live.

For the tax year 2020 to 2021, the annual Rent a Room limit is £7,500. However, this reduces to £3,750 if someone else receives income from letting accommodation in the same property, such as a joint owner.

You can use the scheme if the following applies:

• You let a furnished room to a lodger
• Your letting activity amounts to a business, for example:

1. Run a guest house
2. Run a bed and breakfast
3. Provide ‘services’ such as meals or cleaning

You can learn much more about the ‘rent a room’ scheme on the HMRC website.

If you have invested in property or accommodation, you do not live full-time and run it as an Airbnb business; it will be taxed as a business operation.

You will need to register for and submit a Self-Assessment tax return to declare your income.

Business rates on furnished holiday lets in the UK

Airbnb hosts who own investment properties in the UK may also be subject to business rates. It may vary depending on the part of the UK your property is in:

Country	Availability	Subject to business rates
England	Available to let for 140 days or more in a year is classed as a self-catering property
Scotland	Available to let for at least 140 days in a year
Wales	Available to let for at least 140 days in a year and is rented for at least 70 days

How much tax do I have to pay on Airbnb income?

You must declare any income you receive on any Airbnb or short-term rental income to HMRC. Tax will then be due on any amount over an individual’s ‘Personal Allowance’ for that year which is currently set at £12,500 for 20/21. 

You must add your Airbnb earnings to your total taxable income, which will then be taxed, or you may qualify for a separate tax-free allowance from your primary income if you rent a room on Airbnb. It depends on whether you are: 

• Renting out a room in your primary residence
• Renting out an investment property

If you are letting a room in your own home, the first £7,500 is tax-free in the UK as part of the ‘Rent A Room’ scheme. However, this rule does not apply if you run Airbnb in your investment property.

Airbnb tax UK: Do I need to pay VAT?

Yes, if your rental income hits the VAT threshold of £85,000 in a year, you will need to register for VAT.

You have  a few options here:

• Charge VAT to your guests the additional 20% on top of the rental rate
• Absorb the VAT cost yourself
• Consider meeting somewhere in the middle so that both you and your guests benefit and you keep your prices competitive.

Capital Gains Relief Tax

As an Airbnb host renting out a room in their home residence, you may be wondering if buying an investment property and turning it into an Airbnb makes sense. If your home qualifies as a Furnished Holiday Let and is not your primary residence, you may be entitled to Capital Gains Tax relief.

• With the Entrepreneurs' Relief plan, you pay 10% capital gains tax instead of 28%.
• With the Rollover Relief plan, you can avoid paying Capital Gains Tax on the sale of your first Airbnb home.
• The potential to avoid paying Capital Gains Tax by giving away or selling firm assets for less than their value to aid the buyer.
• Capital allowances for furnishings and fixtures.

Can I offset letting losses against other income?

The UK government no longer allows Airbnb hosts to offset their FHL losses against other income. However, the current system allows you to offset Airbnb income losses against future profits for the same property.

Entrepreneur’s relief

Perhaps one of the most useful and commonly used reliefs. The Entrepreneurs relief allows the business owner to pay a flat 10% tax on the chargeable Capital Gains as compared to Capital Gains tax of up to 28% that may be applicable on non FHL properties.

HMRC investigate the income of Airbnb hosts

In 2019, the Airbnb UK accounts for the year (up to 31 December) included a statement that they would be sharing In 2019, the Airbnb UK accounts for the year (up to 31 December) included a statement that they would be sharing data with HMRC about the earnings of those who let out their property on its UK platform, which led to HMRC launching tax investigations into around 225,000 hosts.

If you are an Airbnb host or are thinking about becoming one, please speak to us, and we will help you remain compliant with the HMRC and its property rental tax rules. Why not give Pearl Accountants a call at 020 8582 0076 for a free consultation today or email us at info@pearlaccountants.com for more information.