I’ve updated this post on 5 August 2020 for the latest changes in VAT legislation
I love Airbnb! As a guest, I find it is always full of unique experiences, the chance to meet new people and, of course, access reasonably priced accommodation with some memorable hosts. However, tax and VAT for Airbnb hosts can cause no end of headaches when you’re not sure where you stand with HMRC and Airbnb hosting.
For example, on my last escape from London (to a stunning cottage in the Costwolds), I had an interesting conversation with my Airbnb host who was confused by UK taxes and VAT.
His main concerns were around:
- Whether he had to pay tax on his Airbnb income and how he went about doing that without paying huge accountant fees;
- Does he qualify as self-employed?;
- If he should be letting HMRC know he’s an Airbnb Host (and is he in trouble for not having done so already!);
- What other taxes he needed to know about as a holiday let landlord;
- And if he does have to pay tax, did I have any secret tips to help him save money?!
Here’s what I told him…
Is Airbnb Considered Self-Employment?
No, an Airbnb host doesn’t have to consider themselves as self-employed.
It’s easy to confuse because an Airbnb host is hoping to make money. Just like anyone who is self-employed and runs their own small business, HMRC and Airbnb hosting is considered the same.
But actually, you need to follow slightly different HMRC and Airbnb hosting rules when it comes to taxes.
The money you receive as a host is classified as rental income.
That means you’ll fall under the rules of “UK Property”. They cover everything from rental properties to holiday lets and agricultural land.
Do You Have to Pay Tax on Your UK Airbnb Income?
Yes, you may have to pay tax on your UK Airbnb Income. However, it depends on how much money you are making, space you rent out and your entitled reliefs.
Airbnb rentals commonly fall under the HMRC rules of Holiday Letting or Rent-a-Room.
Each of these has different tax rules and exemptions.
That means the amount of tax you have to pay on your UK Airbnb income, or if at all, will depend on your own personal circumstances.
Tax Advice for UK Airbnb Hosts
In this post, I look at 3 common scenarios UK Airbnb Hosts find themselves in and the tax implications of each:
- Renting a Room in Your Own Home on Airbnb
- Renting a Furnished House or Apartment in the UK on Airbnb
- Live in the UK and Rent a Property Overseas on Airbnb
1. Tax Advice for UK Airbnb Hosts who Rent a Room in their Own Home
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 rent. This is referred to as the Rent a Room Scheme.
The tax year runs from 6 April to 5 April.
You don’t need to own your property either. You’ll qualify to claim rent-a-room tax relief if you rent your home too.
Either way, you should probably double-check your rental or mortgage agreement to check you breaking any of the terms.
However, be aware that recent changes to the scheme mean you must be present in the house for at least part of the time the lodger is in the property.
I have written more about the Rent a Room Scheme which should help you if this is something you’d like to claim.
2. Airbnb Hosts Renting a Property in the UK
Airbnb hosts renting out a property in the UK that they do not live in, most likely to fall into the category of Furnished Holiday Let Landlords.
Furnished Holiday Lets (FHL) is a booming industry! This is because property rentals that fall into this category receive more favourable tax treatments than Residential Property Rentals.
What is the Furnished Holiday Let Tax Rules for UK Airbnb Hosts?
HMRC sets out strict rules for a property in order to consider it as a furnished holiday let. These are:
- Your property must be in the UK or in the European Economic Area (EEA). The EEA includes Iceland, Liechtenstein and Norway;
- The property is 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;
- You cannot include long term lets of over 31 days in total for a stay.
(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 can 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 years in a row, then adjustments to tax treatments, capital allowances and capital gains tax.
Check out the HMRC website for more information where they have issued a really useful Guide on Furnished Holiday Lets.
If you are unsure on the tax status of your Airbnb property, then contact a professional.
3. Renting Out a Furnished Property Overseas
If are you an Airbnb Host living in the UK but renting out a furnished property overseas, then 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.
How Much Tax Do You Pay as a UK Airbnb Host?
The amount of tax you pay as an Airbnb Host depends on two things:
- Your Airbnb profits;
- Your total earnings for the tax year.
How to Calculate Your Airbnb Profits
The amount of tax you pay is based on your Airbnb profits.
Profit means all your Airbnb income less all your allowable costs.
That means if you want to reduce your tax bill, you’ll need to make sure you deduct everything you have paid for against your income to reduce your profits.
What expenses are Tax Deductible against Airbnb Income
Here are some tax deductions many Airbnb Hosts are able to claim for that reduce their tax bill:
- Airbnb commissions
- Repairs and maintenance
- TV Licence
- Accountants fees
- Travel & mileage to and from your property
Download my expenses cheatsheet
How to Calculate Your Tax
The amount of tax you pay depends on the total amount you earn during a tax year.
The current income tax rates are:
|0% tax (personal allowance)||on the first £12,500||on the first £12,500||on the first £11,850|
|20% tax (basic rate)||on the next £37,500||on the next £37,500||on the next £34,500|
|40% tax (higher rate)||on the next £100,000||on the next £100,000||on the next £103,650|
|45% tax (additional rate)||on everything over £100,000||on everything over £100,000||on everything over £103,650|
An Example of Working Out Your Income Tax:
In the tax year 2018/2019, Sarah:
- Earns £45,000 per year in full-time employment;
- Made £10,000 profit using letting a property on Airbnb;
Sarah’s total income is £55,000 so her tax bill would be £10,360 which is worked out as follows:
£11,850 x 0% = £0.00
£34,500 x 20% = £6,900
£8,650 x 40% = £3,460
You can deduct any tax you have paid through the payroll system against your total tax bill.
You’ll find this on your payslips or P60.
How to Register with HMRC as an Airbnb Host
Once you have completed the online form, you are registered for HMRC Self-Assessment and you will:
- Receive a UTR number, which a 10 digit code;
- Need to complete a self-assessment tax return form by 31 January each year declaring your income in the UK Land & Property section (see below);
- Pay any tax due by 31 January each year (along with payments on account by 31 January and 31 July each year).
Record Keeping for UK Airbnb Hosts
HMRC for Airbnb hosting require you to keep details of your income and expenses.
This means keeping:
- Records of your income from Airbnb;
- Details of all the expenses you are claiming as tax deductions;
- Storing all your receipts and bank statements.
An effective record keeping system will make tax time much easier and avoid the last minute stress of trying to remember all your tax deductions to reduce your tax bill.
To make your record keeping and taxes easier you should:
- Opening a separate bank account for all your Airbnb income and expenses;
- Set up an accounting software like Quickbooks which tracks your mileage, stores all your receipts, analyses your bank transactions and automatically generates the numbers you need for your tax return;
- Allocate specific time on a regular basis to bringing your bookkeeping up to date.
VAT Advice for UK Airbnb Hosts
The Chancellor has announced a VAT reduction for the hospitality industry as part of Coronavirus measures, cutting VAT from 20% to 5% between the 15 July 2020 and 12 January 2021. This applies to hotel and B&B accommodation, so if you are VAT registered, you can (but are not legally obliged to) reduce the VAT you are charging to your visitor. Read more about the 5% VAT cut here.
Whilst a regular residential rental is not subject to VAT, holiday let rentals do fall into the VAT rules. That means depending on your Airbnb income you may need to register for VAT.
You need to register for VAT when your taxable turnover reaches the VAT threshold, currently £85,000 for tax year 2020/2021.
Taxable turnover means your gross earnings from Airbnb. That is what your guests pay per night before deductions by Airbnb or any other costs.
Therefore, if your income (not profit), from Airbnb reaches this threshold, you are 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.
When you are registered for VAT, it carries with it specific reporting requirements and record-keeping. You can find more information about this here.
Capital Gains Tax for UK Airbnb Hosts
This is another tax UK Airbnb Hosts need to be aware of, although it only arises when you sell your property.
Capital Gains Tax 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. Furthermore, 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.
Capital Gains Tax If you Rent a Holiday Home
Under Furnished Holiday Letting rules, there is some argument that qualifies for Entrepreneurs Relief. This relief 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. Therefore, if you did choose to sell your holiday home, you could potentially end up with a Capital Gains Tax bill.
If you are in this position, you should definitely seek professional advice.
You can use Entrepreneurs Relief when you sell your furnished holiday let properties in order to reduce your Capital Gains Tax.
Using this tax relief means you’ll pay capital gains at a rate of 10% rather than 28%.
If you sell one of your Airbnb rentals and then buy another, you may be able to defer Capital Gains Tax by “rolling it over” until you sell your new one.
That could really help with your cash flow and avoid a huge tax bill that you have to handle alongside the purchase of your new rental.