23rd February 2021Beth-Anne Bruce0 Comments.16 minutesLandlords
Renting out your holiday home or short-term let can yield attractive returns if it’s done well. It’s an incredibly popular way to bring in extra income, especially thanks to the meteoric rise of Airbnb and some favourable buy-to-let tax rules.
HMRC investigate income of Airbnb hosts
Airbnb hosts up and down the country are now being warned of crippling tax bills and fines if they don’t declare income from renting part of their homes. It follows the launch of an HMRC investigation after receiving the income details of Airbnb’s 225,000 UK hosts.
Airbnb was required to share the information following an HMRC enquiry into its own tax bill (along with an additional £1.8 million for their tax bill – ouch). If you’re an Airbnb host, or you’re thinking about becoming one, we’ve put this guide together to help you avoid falling foul of the rules.
Am I allowed to rent out part or all of my property?
If the property you’re looking to rent out is mortgaged, it’s essential you check your lender’s terms and conditions around renting it out. This is the case whether you wish to let the whole property, or just part of it.
Lenders tend to be very specific about what they allow. Breaking the rules can have very harsh – not to mention expensive – consequences. Having said that, if you’re honest about your plans, many will consider requests on a case-by-case basis (though usually subject to additional fees).
Check with your mortgage provider, freeholder or landlord before renting out.
Generally speaking, short term lets aren’t a problem. If you plan to rent out the property for longer periods then you may need to switch mortgages. This is why it’s so important to check with your lender early on, and discuss your plans with them.
Also bear in mind that if you rent the property yourself, or if it belongs to a council or housing association, then subletting may not be permitted. So again, seek permission first.
Is Airbnb classed as self-employment?
When the whole of a property (or a part of it) is rented out, the resultant income is classed as rental income. It’s easy to get confused here, because Airbnb hosts are making money as a small business/sole trader, so it does look like they’re self-employed. But actually, they’re not – and different tax rules apply. At this point, you might also find our recent article Do Buy-To-Let Landlords Pay Tax? useful.
Do I have to pay tax on Airbnb income?
You must declare any income you receive, from any source (including 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.
The Personal Allowance is how much income you can earn in a tax year before starting to pay tax on it. For the 2020/21 tax year this is currently set at £12,500.
Airbnb earnings must be added to your total taxable income, with everything then taxed all together. However, you may have a separate tax-free allowance from your main income if you rent a room on Airbnb. It’s called Rent a Room relief, which we’ll look at further down.
How do I pay tax on Airbnb income?
To declare your income, you’ll need to register for and submit Self Assessment tax returns. All your earnings (including what you earn from your employer) must be declared in your Self Assessment tax return.
We strongly recommend you use software (like Pandle!) to help you keep track of your income and expenditure during the year. It means that everything will be ready in one place when Self Assessment time rolls round.
Now is the time to ‘fess up
If you’re a landlord or rental host – via Airbnb or elsewhere – and you’re concerned about underpayment of tax, then now is time to come clean. HMRC take a dim view of those who’ve simply kept quiet, and if you do owe tax there are a number of ways forward. Remember that HMRC has the power to look back over the last twenty years of records if it needs to!
HMRC also now has full information on how much landlords have received through the Airbnb booking system. There really is nowhere to hide.
It’s absolutely vital that landlords and short-term hosts understand their tax obligations and keep accurate records of their income and expenditure.
What is the Rent a Room Scheme?
The Rent a Room Scheme can be claimed by anyone who rents out a room in the property they live in. It doesn’t matter whether the room being let is furnished or unfurnished.
Landlords letting out a room in this way can benefit from a further £7,500 tax-free allowance from this rental income. Obviously, the relief won’t be claimable by all Airbnb hosts, but it’s a valuable extra tax break for those who are wanting to rent out just one room in their main residence.
An example of working out the Rent a Room Scheme
Mark earns £20,000 per year from his main job. As an employee he pays tax at 20% on anything he earns over his personal allowance (currently £12,500). In this case, the amount of income subject to tax is £7,500. His employer deducts the tax each time they pay him.
Mark also rents out a room in his house through Airbnb. Thanks to the Rent a Room Relief scheme, he can make an additional £7,500 maximum income and not need to pay any tax on it.
How it works for couples
Couples will often rent out a room in their home on Airbnb together. If this is the case, then the Rent a Room allowance is split equally between them into £3,750 each (as long as the room is inside a joint main residence).
For all other situations, for example if a group of friends own the house, then the Rent a Room relief cannot be claimed. That means tax will be due on the Airbnb income straight away.
What is Section 24 for landlords?
Section 24 refers to an update to UK tax laws dealing with the way tax is calculated for landlords. The changes mean landlords can no longer deduct mortgage interest and other costs (such as mortgage arrangement fees) from their rental income before working out their tax liability.
It’s significant, because deducting allowable expenses from income reduces the amount which is subject to tax, therefore reducing the tax bill.
It’s worth noting that Section 24 does not apply to properties considered to be a Furnished Holiday Let.
Does my property qualify as a Furnished Holiday Let?
To answer this question, it’s important to know what a ‘Furnished Holiday Let’ actually is in legal terms. To be a FHL, your Airbnb must:
Be located in the United Kingdom or European Economic Area (EEA).
Have enough furniture available for everyday use.
Be displayed on the Airbnb website and be available to let for a minimum of 210 days of the year.
Be rented out as a commercial let to the public for 105 days per year or more.
Do Section 24 tax rules apply to Airbnb?
Large numbers of Airbnb hosts are avoiding the Section 24 interest relief restriction because their properties are indeed Furnished Holiday Lets as discussed above. Section 24 rules come into force on properties not classed as FHLs.
The restriction essentially means that higher rate tax payers can’t claim full relief on their mortgage interest. However, many people are finding it makes financial sense to move from traditional long-term letting to Airbnb, due to increased income but less tax.
How does the trading income allowance work regarding Airbnb rentals?
There are also tax-free allowances available for property and trading income. The trading income allowance means that you can earn up to £1,000 as a sole trader or from property each tax year, and you won’t have to declare this to HMRC. If you have both types of income, you’ll get a £1,000 allowance for each.
If you earn more than £1,000 then you can either use the allowance or deduct any allowable expenses to reduce the amount of tax that you pay. Watch our video about claiming expenses to learn more.
It’s worth noting that you can’t claim the Rent a Room Scheme and the trading allowance at the same time for the same income. In other words, you can’t receive two lots of relief for the same income.
Capital Gains Tax for Airbnb hosts
It’s clear there are some serious financial advantages to renting out a property on the Airbnb website. For many it’s become a lucrative way of bringing in a primary or secondary income.
But there’s more good news too: If your property is a Furnished Holiday Let, and you don’t live there full time yourself, you can claim Capital Gains Tax relief. This may include:
Access to capital allowances for property fixtures, fittings and furniture.
Using the Gift Hold-Over Relief scheme to avoid paying capital gains tax. This is where owners sell or give away any assets in their business for less than they are worth so that they can help the buyer.
The chance to defer capital gains tax liability when you sell one Airbnb residence and buy another one via the Rollover Relief scheme.
Don’t forget about VAT
Remember that if you earn £85,000 or more from your Airbnb rental, you’ll need to register for and pay VAT. You can decide to charge VAT to your guests directly by adding 20% on top of the rental rate, or you might simply choose to absorb the VAT yourself.
Alternatively, you could compromise by slightly increasing your nightly rate so that you bear some of the VAT burden, and share it with your guests. The advantage of this is that you don’t take the full financial hit, and your prices are still competitive.
Top tip: Use the very best tax software available to make Airbnb accounting easy
When you draw an income from working in the gig economy – which Airbnb is a part of – keeping track of your income, tax and expenditure can soon become a real headache.
Rules around VAT and other tax-related issues can change regularly. If you’ve never earned income this way before it can all seem pretty daunting.
Easy to use tax software (like our very own Pandle!) will help you manage cash flow and cut down the time you spend on admin. Everything is saved to the cloud too, so it’s accessible 24/7 from any device which connects to the internet – no messing around with bits of paper!
How far back can HMRC investigate?
The fact is, if HMRC suspects an error in your tax calculations, or any other anomaly in your reporting, they’re likely to investigate at some point. Investigations, even into innocent mistakes, can go back between 4 and 6 years.
If HMRC thinks the errors are deliberate and/or that fraudulent activity has gone on, it may look back over the last 20 years. Any outstanding tax must be paid, with interest and fines on top. It’s really not worth the risk.
Paying tax in full and on time isn’t exactly the most exciting thing about being an Airbnb host. But, getting it wrong is not only illegal, it can also get you into serious hot water with HMRC. People who are new to Airbnb or who haven’t embarked on a similar income stream before may not be aware what their tax obligations are. Unfortunately, lack of awareness is no excuse as far as HMRC are concerned.