The accessibility of short-term holiday let sites like Airbnb, along with some favourable buy-to-let tax rules, mean that renting out property is a great opportunity to bring in extra income. We’ve prepared this guide to explain what this might mean for declaring and paying tax on any earnings you make from a property rental, and ways that you may be able to save money.

Maybe. Whether you’re looking to let the whole property or just a bit of it, if it’s mortgaged you’ll need to check your lender’s terms and conditions around renting it out to anyone.

Some lenders can be very specific about what they allow, and breaking their rules can have very harsh – not to mention expensive – consequences. Having said that, if you’re honest about your plans, many mortgage providers will consider requests on a case-by-case basis (though this might be subject to additional fees).

 
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.

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.
 

You must declare any property or self-employment income if the total amount you receive from it in a tax year is more than £1,000. This is thanks to the tax-free trading allowance.

What does the trading allowance mean for Airbnb rental income?

The trading allowance means that you can earn up to £1,000 of property income or as a sole trader each tax year, and you won’t have to declare this to HMRC. If you have both types of income (you’re a sole trader and you earn money from property) you’ll get a £1,000 allowance for each.

What happens if I earn more than the allowance?

You’ll need to register with HMRC, and declare the earnings that you make from renting out your property on Airbnb (or whichever method you might be using).

Will HMRC know about my Airbnb rental income?

Yes, there’s a very good chance they will! Platforms such as Airbnb fall under the digital platform reporting rules, so they’re required to collect information about what you earn from renting out your property through the site, and then report this to HMRC. You’ll receive a copy of the data they pass on, so it’s crucial to ensure this is accurate.

To declare your income as a sole trader, you’ll need to register for Self Assessment by 5th October following the end of the tax year that you need to report income for. Once registered, you’ll need to submit Self Assessment tax returns and provide the details of all your earnings from that tax year, including anything you might already have paid tax on, such as wages from an employer.

Anything you earn over the Personal Tax Allowance (currently £12,570 for the 2023/24 tax year) will be subject to tax just like any other type of income, but the good news is that there are other allowances and types of tax relief that you might be able to claim to reduce your bill.

This is because the tax that you pay is based on your profits (what’s left after deducting any allowances or expenses), rather than the total amount of income.

Claiming the trading allowance on your tax return

Remember that £1,000 trading allowance that we mentioned earlier? You might still be able to claim this, even after you register with HMRC. On your tax return you’ll be given the choice of claiming either the trading allowance or your expenses.

• If the expenses that you incur as a result of letting out property on Airbnb are less than the £1,000 allowance, it makes more sense to claim the allowance on your tax return, helping to reduce your tax bill by a larger amount.
• If your allowable expenses are more than the £1,000 trading allowance, claim those instead!

You might have a tax-free allowance separate to your main income if you rent a room on Airbnb. 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 tax break for those who want to rent out just one room in their main residence.

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.

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.

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 an 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. Many people are finding it makes financial sense to move from traditional long-term letting to Airbnb, due to increased income but less tax.

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:

• A preferential Capital Gains Tax rate of 10% instead of 28% when the property is sold under the Business Asset Disposal Relief scheme (previously known as Entrepreneurs’ Relief).
• 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 £90,000 or more from your Airbnb rental in a 12-month period, you’ll need to register for VAT. You can decide to charge VAT to your guests directly by adding it 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.

Make your Airbnb project a success and discover our online accountancy services for property managers. Call 020 3355 4047, or get an instant online quote.