Renting your property through Airbnb can be an great way of earning extra income. However, even if hosting is your side hustle, Airbnb hosts are responsible for complying with UK tax laws. We have created this guide to simplify the process for you, so there’s no need to worry.
In 2020, Airbnb shared the income data of 225,000 UK hosts with tax officials, placing many hosts’ finances under the microscope. This is why Airbnb hosts need to be up-to-date with the latest tax rules and regulations. That said, it can sometimes be pretty tricky and confusing to try and navigate this by yourself.
Whether you have questions around how much tax you need to pay, if you're eligible for tax relief, or if there are any tax advantages for Airbnb hosts, soon you’ll have all the answers you need. However, if you are left with any burning questions it’s best to reach out to your local tax office for confirmation and clarity.
Do I have to declare income earned through Airbnb?
Whether or not you need to declare the income you earn through Airbnb depends on how much you earn. If you earn less than £1,000 a year through hosting, you do not need to declare the income you earn through the platform.
So, if you’re just starting as a host and trying to work out whether it’s for you, luckily you can do this without the hassle of filing a self-assessment tax return.
On the other hand, if you earn income above the £1000 threshold, you will have to declare this through HMRC’s self-assessment tax return under the UK Land & Property section.
Before filing a self-assessment tax return, you must register with HMRC. But don’t worry it’s not a difficult process. Once you’ve registered with HMRC, you will be sent a 10-digit Unique Taxpayer Reference (UTR) number. Remember, keep this number safe because just like your National Insurance (NI), it’s yours for life.
How do I locate my Airbnb Earnings for Tax Purposes?
It’s always a good idea to keep an eye on how much you are earning through Airbnb so that when it comes to filing your tax return you're well-informed and up-to-date. After all, nobody wants the last minute panic of not being able to locate important tax information.
To find all the essential data on your Airbnb earnings, simply locate the Settings page, and select “Transaction History”. Once there, you will be able to filter transactions by payout method, listing, and date.
You will then have the opportunity to view completed payouts, upcoming payouts and gross earnings. This page also gives you the option to export your earnings and transaction history into a spreadsheet which will be useful when you file your tax return.
Do I have to pay income tax on my Airbnb property?
It may come as a surprise that Airbnb hosts are not actually legally classified as self-employed workers. As a result, hosts must adhere to slightly different HMRC rules.
The rules vary depending on whether you are letting out a room in your home, or renting out an entire property. In the case of the latter it would most likely be classified as a Furnished Holiday Let (FHL). We'll look at both of these separately.
Whether or not you pay tax on this income and the amount of tax that you pay will depend on several different factors. This includes the kind of property that you let, how much you earn through letting this property, and any tax relief that you are eligible for.
Fortunately, in the UK, everyone is entitled to a certain amount of tax-free income. For the year 2020/21 this amount was £12,500, however from April 6, 2021, the Personal Allowance amount is set to rise to £12,570. If you already have a full time job the chances are that this tax-free allowance is already spoken for, but if Airbnb hosting is your only income then earning under £12,570 means you won’t have to pay a penny in income tax. Horray!
What is a Furnished Holiday Let (FHL)?
According to HMRC, to classify as a Furnished Holiday Let (FHL), a property must fulfil the following criteria:
- The property must be available to rent for at least 210 days per year
- Of those 210 days, the property must be rented out for at least 105 days per year
- The furniture in the property should be adequate for normal occupation and occupants must be permitted to use the furniture within the property
- The property must be located in the United Kingdom, or the European Economic Area (EEA)
- It must be rented out to holidaymakers not just friends and family
- The property must be rented out on a short-term basis, not exceeding 31 days in duration for the same tenant – except for in exceptional or unexpected circumstances
Are there any FHL tax advantages?
FHLs come with many tax advantages. If your property is classified as an FHL, you will be entitled to capital allowance for property furniture, equipment and fittings (this includes plants and machinery). This can significantly reduce your income tax liability, giving you more money to spend elsewhere!
Moreover, if your property is an FHL, for tax purposes you will be classified as a business. This means that you will also be entitled to allowable expenses. Allowable expenses can offset the costs of repair bills, utility bills and cleaning bills (which can sometimes, depending on the renter, can be pretty high).
Another tax advantage that comes with FHLs, is that unlike buy-to-let properties, rental profits from FHL’s are considered “Relevant Earnings”. But what exactly does that mean? Well, primarily it means that you can make tax-advantaged pension contributions, something which your future self will certainly thank you for. On top of this, earnings from FHLs are not subject to National Insurance Contributions.
Further to this, if you share the ownership of your property with a spouse, you can decide how to split the profit and divide it up in a more tax-efficient way. Again, this will certainly save you some pennies in the long run.
Additionally, FHLs also qualify for mortgage interest relief. This means that you can offset your mortgage interest against your profit, once again reducing your income tax liability.
Is my FHL Airbnb property eligible for Capital Gains Tax relief?
Fortunately, there are some instances where an Airbnb property can be eligible for Capital Gains Tax relief. If your property qualifies as an FHL and is a second home, there are schemes that can minimise tax liability.
Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief enables individuals who sell their Airbnb property to have their gain taxed at 10%, rather than at 18% or 28%. Considering how much you will save with this kind of tax relief you should double-check your eligibility.
Another big (temporary) money saver is Rollover Relief. This allows individuals who sell on their Airbnb property and acquire another to defer paying their Capital Gain Tax until they sell on their new property.
Can you rent a room through Airbnb?
While you may not want to rent out your whole property, if you have some extra space in your home, you can always choose to rent out a room on Airbnb. Whether your children have just flown the nest, or you’ve finally cleared out the clutter in your spare room, renting a room can be a great way to boost your income.
However, it’s important to bear in mind that even if you only rent out a room in your home, the income that you earn through this will still be subject to UK tax laws. Luckily, the Rent a Room Scheme can significantly reduce your tax liability.
What is the Rent a Room Scheme and who qualifies for it?
The Rent a Room Scheme was launched back in 1992 and enables home occupiers to rent out part of their home tax-free up to the threshold of £7,500. This amount reduces to £3,750 in situations where there are joint owners.
According to HMRC: “The government intended this to increase the quantity and variety of low-cost rented accommodation, giving more choice to tenants and making it easier for people to move around the country for work”.
Importantly, one thing to note is that home occupiers do not have to own their property to be eligible for this tax break. That said, if you do not own the property and wish to rent out a room in your home, you must not violate your tenancy agreement by doing so. So, it’s always best to double-check with your landlord or letting agency. In addition to this, another qualifier for this scheme is that the home must be sufficiently furnished, and must be part of the occupier's main home.
Likewise, individuals are not eligible for the scheme if their property is used for business, or if it’s let out while the occupier lives abroad.
In April 2019, further rules were introduced to stop people from taking advantage of the scheme. Under the new rules, the beneficiary of the scheme must reside in the property at some point throughout it being let out. So, that means if you take a month-long trip to the Bahamas, you cannot claim relief for the room that you rent out if you are not living at the property at some point during it being let.
How much money will I have to pay in income tax?
When it comes to the amount of income tax that you have to pay, once Personal Allowance and tax reliefs are deducted, it’s really pretty simple and the normal rules apply.
This means that the rate of tax you owe will be calculated depending on the relevant tax band. In England, the basic tax rate is 20% and applies to income of £12,501 to £50,000. The higher rate is 40% and applies to income of £50,001 to £150,000. Lastly, the additional rate is 45% and applies to income of £150,000 and above.
In Scotland, the tax bands are slightly different. The starter rate is 19% and applies to income of £12,501 to £14,585. The basic rate is 20% and applies to income of £14,586 to £25,158. The intermediate rate is 21% and applies to income of £25,159 to £43,430. The higher rate is 41% and applies to income of £43,431 to £150,000. Finally, the top rate is 46% and applies to income of £150,000 and above.
Will I have to pay council tax or business rates on my Airbnb property?
When renting your property as an Airbnb host, you mustn't forget about the existence of council tax. Whether or not you pay this tax will depend on whether your property qualifies for business rates.
In England, if your property is available to rent for 140 days or more in a year, it will be subject to business rates as it will be classified as a self-catering property. The same goes for Airbnb properties in Scotland.
However, the rules are slightly different if your property is in Wales. In Wales, if your property is available to let for at least 140 days, but is rented for at least 70 days, it will be subject to business rates.
If this doesn’t apply to you, then you will need to pay council tax on your Airbnb property instead.
That being said, over the last few years some councils have been lobbying for the introduction of business rates for all Airbnb properties. A change could potentially be on the horizon, so it’s best to keep an eye out for updates.
Does VAT apply to Airbnb letting?
Value Added Tax or VAT is an area that is sometimes overlooked when it comes to Airbnb letting. However, while it doesn’t apply to all hosts, you don’t want to risk getting caught out on this one. Late payments can mean that you get hit with a pretty hefty amount of interest.
If your taxable income exceeds the VAT threshold of £85,000 over 12 months, you will have to register for VAT. In situations where VAT does apply, hosts can apply a 20% charge on the rent of their Airbnb property.