Renting out your property when you’re not there, also known as a Furnished Holiday Let, is a great way to make extra money. However, if you live in the United Kingdom, you need to know about the tax rules.
Many Airbnb hosts have faced challenges when it comes to paying income tax on their rental earnings. Taking action early is much better than facing potential tax fines later on. Plus, as a host, you have the chance to take advantage of different tax breaks and allowances.
Does my property qualify as a Furnished Holiday Let?
Understanding Airbnb Income Tax requires familiarizing yourself with the term ‘Furnished Holiday Let.’ For your property to qualify, it must:
- Be open for Airbnb bookings for at least 210 days each year.
- Be well-furnished for everyday living.
- Be situated in the United Kingdom or the European Economic Area (EEA).
- Be rented out for commercial purposes to guests for at least 105 days annually.
Why should I pay Airbnb Income Tax?
You might have started renting out your property on Airbnb as a small side project to make some extra money. However, being an Airbnb host is essentially like running a small business. As a result, just like any business owner, you are required to pay taxes on your income.
In the UK, you can earn up to £11,850 per year without having to pay any tax. So, if you make a small amount of money each month from Airbnb and it adds up to less than £11,850 over the year, you don’t have to pay tax on that income. However, if you earn more than this amount, you need to report your income and pay the necessary taxes.
It’s important to be proactive and stay informed about Airbnb taxes to avoid penalties later on, especially since there are tax benefits and allowances available that can help hosts save money.
How much tax do I owe on my Airbnb income?
Understanding the tax differences between renting out a room in your home versus renting out an investment property is key for Airbnb income tax.
If you rent a room in your home, you could qualify for various tax-free allowances and benefits. On the other hand, if you are renting out an investment property through Airbnb, you’ll be taxed like a business owner.
In the UK, owners of furnished holiday lets might have to pay business rates. Specifically, in England, a property available for rent for 140 or more days a year is considered a self-catering property and is subject to business rates. In Wales, the rules are the same, but the property must also be actually rented out for at least 70 days. In Scotland, local assessors decide if business rates apply, considering the property’s type, size, and location.
If you run a larger guest house or B&B that accommodates more than six people at once, you may also need to pay business rates.
Who is responsible for council tax on a holiday let?
For holiday homes or investment properties on Airbnb available for less than 140 days yearly, council tax applies instead of business rates.
Can I offset letting losses against other income? The UK government ceased allowing Airbnb hosts to offset furnished holiday letting losses against other forms of income after April 2012. Now, you can only offset losses against future profits from the same property.
Don’t overlook VAT
Remember, surpassing a total Airbnb rental income of £85,000 triggers the need for VAT registration.
You might opt to pass the VAT costs onto your guests, absorb them yourself, or find a middle ground by slightly raising your accommodation’s nightly rate.
Qualifying as a Furnished Holiday Let unlocks various benefits:
- Profits contribute towards your pension eligibility.
- You can claim allowances for fixtures, furniture, and certain equipment.
- Capital Gains Tax relief programs like Entrepreneurs’ Relief or Business Asset Rollover Relief might apply.
Tax-free threshold for Airbnb
In the UK, Airbnb earnings contribute to your taxable income, potentially attracting corporation tax, income tax, business rates, and VAT, contingent on your annual earnings. Since 2016, the Rent A Room Relief scheme has elevated the tax-free threshold for furnished holiday lets to £7,500, applicable to renting rooms in your primary residence. Investment properties follow different regulations.
Micro-Entrepreneurs Allowance and Airbnb
The UK government’s scheme for micro-entrepreneurs, including Airbnb hosts, permits a £1,000 deduction from gross income to determine taxable rental income, bypassing the need to calculate and subtract actual incurred expenses.
Note that claiming both the Micro-Entrepreneurs Allowance and Rent A Room Relief on the same income is not permissible.
Capital Gains Tax Relief
Investment property owners converting to Airbnb may access capital gains tax relief if the property qualifies as a Furnished Holiday Let. Benefits include a reduced 10% capital gains tax rate under Entrepreneurs’ Relief and the ability to defer or avoid capital gains tax under specific circumstances, alongside capital allowances for property furnishings.
Need guidance with your Airbnb? A wealth of online resources exists to assist you with Airbnb tax matters. Here are a few we recommend:
- UK Gov website – Self Assessment Tax Returns
- Airbnb – UK Rental Income Taxation Guidance
- Go Simple Tax Software – Self Assessment Tool
Additionally, our Keey team in London stands ready to help you navigate the complexities of managing an Airbnb.