There is no doubt, Airbnb has revolutionised not just the way people plan their travel but also how property owners choose to rent out their spaces not just in the UK but across more than 190 countries in the world. Airbnb has grown at an unbelievable rate, attracting users from different countries, age groups and backgrounds with a simple to use platform. Unfortunately, what can be a bit more tricky to understand are the tax responsibilities for the Airbnb hosts renting out accommodation.
We want to demystify Tax and VAT for Airbnb hosts to help you:
- Understand which taxes you need to pay, as well as how much and when;
- Figure out what reliefs and exemptions are available to you to reduce your tax bill as much as possible;
- Make you aware of other taxes that may affect you such as VAT or Capital Gains Tax.
How HMRC Classifies Airbnb Hosts
No doubt you are renting out your property or room to make some money on your property and this probably means you may need to declare your earnings and pay some tax. However which tax you pay, if at all, depends on what you rent on Airbnb and where it is located. Here are some common scenarios:
- You Rent a Room in Your Own Home
- You Rent a Furnished House or Apartment in the UK (jump to this section)
- You Live in the UK and Rent a Property Overseas (jump to this section)
Renting a Room in Your House on Airbnb
Everyone in the UK is entitled to rent out a furnished room in their own home and collect up to £7,500 tax free each tax year in room rent. A tax year runs from 6 April to 5 April.
This is called the Rent a Room Scheme. The good news is that charge rent of less than £7,500 on letting the room then you do not need to let HMRC know or submit a Personal Tax Return, unless you need to submit one for another reason.
If you collected more than £7,500 in rent then you will need to submit a tax return detailing how much you have made and the tax you need to pay. There are two methods available to you to work out how much you have earned from renting a room in your house:
METHOD A You can simply declare all the rental income you have received from your lodgers and pay tax on the amounts over and above the £7,500 threshold
METHOD B You can choose to show how much profit you made renting the room. The profit is the rental income you collect less any expenses you have incurred. Typical expenses can include insurance, repairs, maintenance, a portion of utility bills and accountants fees.
You can choose each year on your tax return which method suits you because you may find it advantageous to switch between the two depending on how much rent you have collected.
If you are new to Airbnb but plan to rent out a room in your house on a more regular basis moving forward and expect to earn more than £7,500 it could be worthwhile submitting a personal tax return to record your tax loss in the current year as you can use it against future profits and save tax.
In the first instance, if you are collecting rent of more than £7,500 in the tax year you must inform HMRC so they know to expect a tax return from you.
How Much Tax Will You Pay?
Income tax is calculated at different rates according to how much you earn during a tax year. For 2017/2018 the rates are:
|Personal Allowance||Up to £11,500||0%|
|Basic rate||£11,501 to £45,000||20%|
|Higher rate||£45,001 to £150,000||40%|
|Additional rate||over £150,000||45%|
So if lets say in the tax year 2017/2018 Sarah earns £45,000 per year in full time employment and collects £10,000 from renting a room in her house and she opts to use method A for calculating her tax. Her tax bill would be £10,700 which is worked out as follows:
£11,500 0% = £0.00
£33,500 20% = £6,700
£10,000 40% = £4,000
If you paid tax through the payroll system in your part time job, you would be allowed to deduct the total amount of tax you paid from the payable amount of £3,700. The amount of tax you paid will be on your payslips or P60.
Download our our Tax Estimator HERE
Finally, HMRC has some great guidance on the Rent a Room Scheme where they touch on many details around the scheme including time limits and tax losses.
Renting a Furnished Property in the UK
Airbnb hosts renting out a property that they do not live in are most likely to fall into the category of Furnished Holiday Let Landlords.
Furnished Holiday Lets (FHL) is a booming industry because property rentals that fall into this category do receive more favourable tax treatments that the usual Residential Property Rentals.
What are the ‘Furnished Holiday Letting’ Tax Rules?
The criteria for your property to be considered a furnished holiday let are set out by HMRC and are based around location and time:
- Your property must be in the UK or in the European Economic Area (EEA) – the EEA includes Iceland, Liechtenstein and Norway;
- Your property must be furnished – there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture;
- You must be renting out your property to make a profit;
- Your property must be available for letting for at least 210 days in the tax year (do not count any days when you are staying in the property);
- You must actually let your property for 105 days to the public during the tax year;
- Long term lets of over 31 days in total for a stay cannot be included
(A tax year runs from 6 April to 5 April)
This is all quite tight criteria but there is some flexibility. If you have a quiet year and are unable to meet the criteria for letting, then you are allowed to miss 2 consecutive years. Or if you own more than one holiday home then you are allowed to take an average across all your properties.
If you have 3 bad year in a row, then adjustments to tax treatments, capital allowances and capital gains tax would need to be made so you should seek professional advice to help you through this.
More information can be found on the HMRC website where they have issued a really useful Guide on Furnished Holiday Lets.
How Much Tax Will You Pay?
The amount of tax you pay on your Airbnb rental depends on you personal circumstances and how much you earn in total during a tax year.
First things first you will need to gather up all your paperwork relating to all your earnings, not just through Airbnb but also things like employment, self employment or savings for example. The tax you pay on your Airbnb earnings is based on the profit you make (all your income less costs). Gather together all your receipts for things you paid for when renting out your Airbnb, like cleaning costs, tv, repairs etc. These are tax allowable expenses and are really important because they reduce your earnings from Airbnb and the tax you need to pay.
The simplest way to start estimating how much tax you need to pay is to put it all into a spreadsheet. Here is an example of a spreadsheet which is based on a person who has a full time job and two Airbnb rental properties, along with an estimate of the tax they would need to pay by 31 January 2018.
Download our our Tax Estimator HERE
How to Let HMRC You Are An Airbnb Host
As an Airbnb host it is your responsibility to report how much money you make and how much tax you owe to HMRC via self assessment. The simplest way to register for Self Assessment is to visit the HMRC website and register online. The process can take 10 days to complete upon which HMRC will post you a UTR number (Unique Tax Payers Reference). Keep this safe as you will need this code to file your Self Assessment Tax Return.
From this point you must then:
- Keep a list and receipts of all your income and expenses;
- Complete Self Assessment before 31 January each year summarising your business income and expenses;
- Pay any Tax due by 31 January each year (and payments on account by 31 January and 31 July each year).
Your tax return submitted by 31 January covers the previous tax year (a tax year runs from 6 April to 5 April). So for example, your tax return due by 31 January 2018 details your earnings between 6 April 2016 to 5 April 2017 and this will detail your income from your Airbnb income as well as any other earnings you may have (such as rental income, bank interest or dividends).
Watch out, you are also required to make a payments on account to HMRC by 31 July each year too which is normally 50% of your previous years tax bill, so make sure you budget for this additional payment too.
VAT for Airbnb Hosts
VAT is a confusing topic, but as an Airbnb Host it is really important you remain aware of it as it can affect you. Whilst a regular residential rental is not subject to VAT, holiday let rentals do fall into the VAT rules and depending on how much your Airbnb income is you may need to register.
Businesses, whether incorporated or run as individuals are required to charge VAT when their taxable turnover reaches £85,000. Taxable turnover is your gross earnings from Airbnb, what your renters pay per night before deductions by Airbnb or any other costs.
Therefore if your income (not profit) from Airbnb reaches this threshold you will be required to register for VAT and charge an additional 20% to your customers. It is worth noting that all your rents will be subject to the 20% VAT charge, not just those collected above the VAT registration threshold.
Unfortunately this is problematic in the world of Furnished Holiday Lets because it simply makes your pricing uncompetitive. There are many reports of people struggling to rent their holiday homes once they reach this point and of some simply shutting up their holiday let to avoid the additional income that would take them over the VAT threshold.
Being registered for VAT carries with it important reporting requirements and records keeping and there is more information about this here.
Renting Out a Furnished Property Overseas
If you live in the UK but rent a property out overseas you will still need to register for Self Assessment in the UK but you must:
- Keep details of earnings from overseas properties separate for tax purposes;
- Report these earnings separately as they will be taxed as foreign income;
- Report and make any adjustments necessary for foreign tax payment/deductions.
Capital Gains Tax
Capital Gains Tax is another tax your need to be aware of, although it only arises when you sell your property.
If You Rent a Room in Your Own House
When you sell the home you live in you are not subject to paying capital gains tax and if you only ever have one lodger at a time, then you will continue to benefit from being exempt from capital gains tax.
However if you choose to rent more than one room in your house at a time, or perhaps consider renting out other parts like your driveway, then you will start to face the possibility of having to pay capital gains tax on these parts of the property if you choose to sell it.
If you Rent a Holiday Home
Under Furnished Holiday Letting rules there is some argument that qualify for Entrepreneurs Relief. This relief potentially can reduce the amount of Capital Gains Tax payable to potentially 10% rather than Capital Gains Tax at the higher and additional rate of 20% or 28%. This is a grey area with HMRC so it is worth noting that if you did choose to sell your holiday homes you could potentially end up with a Capital Gains Tax bill.
Airbnb and other platforms have given holiday home owners the freedom to rent their own properties out, giving greater control over how and when they rent their properties. However, with this comes tax and VAT responsibilities. It is so important to be aware of how much tax you have to pay as ultimately this comes out of your earnings and should form part of your decision making when you choose how and when to make your properties available.
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