Maximising Your Property Income: Could Airbnb be the Answer?

Over the years people have sought to supplement their income by renting out their home. One increasingly popular way is via Airbnb which is a new way to rent out your property and it is growing fast across the UK.  It is an online marketplace that enables people to list, find, and then rent vacation homes for a processing fee.  The UK’s vote to leave the EU has resulted in the pound dropping against the dollar. This means, if this exchange rate remains, visitors to the UK will find prices cheaper which is adding to the rise in Airbnb hosts. For anyone considering entering this rapidly growing market it is important to consider the tax implications. How are Airbnb rentals taxed and how will the coming changes, to the way in which property income is taxed, affect Airbnb rentals?

How are Airbnb rentals taxed?

To understand how Airbnb is taxed, the first step is to consider what form the rental income takes.  There are different options for Airbnb hosts: they can rent a room or rooms or even a couch in their own home that they also live in or they can rent out a property as a whole.  All of these will be residential furnished lets but there are the added reliefs available where hosts qualify for the rent a room allowance or as furnished holiday lets.

The profit or loss for a residential property not qualifying for additional reliefs is calculated by taking the total income for the period and offsetting allowable expenses. A profit on a furnished property let is taxable to income tax at 20%, 40% or 45% depending on whether you are a basic, higher or additional rate taxpayer.  The rules for residential property income have changed in recently with the removal of the wear and tear allowance and the changes to the relief for mortgage interest and finance costs. If you think these changes may affect you and you would like more information, please get in touch for more detailed advice on these changes:

Where the host lives in the property they rent out, the main benefit for the host is that they are entitled to £7,500 (from April 2016, prior to this is was £4,250) tax-free income under the rent-a-room allowance.  To qualify for the rent-a-room, you must be an individual, renting a furnished, UK residence which must be your only or main residence for all or part of the income period.  If the property is jointly owned the tax-free limit of £7,500 is split between you.  If the total income received exceeds the limit, you then have two choices.  The first is to take the tax free amount from the total income (ignoring all expenses) and you are taxed to income tax on the excess.  The alternative in this situation is to elect for the profit or loss to be calculated as a normal residential property income.

Which option should the host choose?

In order to work out which option is better; the key is to calculate your allowable expenses. If these are less than £7,500, you will be better off using the rent a room allowance. It is important to note that you can switch between the two options each year, however, you must notify HMRC. HMRC assumes the first option unless notified otherwise.

The other option is to see if your property qualifies as a furnished holiday let (FHL). This brings its own benefits in comparison to the normal furnished let. These rules can apply whether you rent just a room or the whole property.  The benefits include the availability of claiming capital allowances, certain capital gains tax reliefs and the profits you make count as ‘earned income’ for pension contribution purposes.  The capital gains tax reliefs include the ability for FHL to qualify for roll over relief and relief for gifts of business assets for hold over.

There are a few conditions for your property to be considered a furnished holiday let. The property must be in one of the 28 EU states or Iceland, Norway or Lichtenstein.  It must be furnished, and available for let for 210 days a year. The property must be let for at least 105 days of the year. The final condition is that the property must not be let on a long period (more than 31 days).

This covers the main tax considerations but whichever option your Airbnb rental comes under it is very important to keep good records.  All taxable income must be declared and HMRC can demand details from Airbnb of all income.  The new digital tax system, expected to start April 2018, will require those with income over £10,000 from their Airbnb may have to start to declare the income quarterly so record keeping will become even more vital.

Finally, in addition to the tax and record keeping the other important considerations are to make sure you comply with all letting rules for your property, all local laws and that you have adequate insurance.

For any advice on the tax considerations or record keeping requirements of starting or running an Airbnb property please get in touch: