Tax on Airbnb Income

Published by Raju Gajurel
Published Date: September 7, 2022

Airbnb hosting has become popular in recent years with increasing number of landlords in London and outside London are using Airbnb as an easy platform to let their buy to let property and own house.

With this popularity, increasing number of our client asks for detailed guidelines on tax on Airbnb hosting income. 

In this Article, we will outline the main tax provisions applicable to Airbnb income.

Do I have to Pay Tax on Airbnb Income?

Yes- subject to some reliefs. 

Airbnb hosting income is same as any other income and so taxable in the UK. The tax treatment and relief depend on whether the property is your main residence or not.

  • Renting one or more furnished rooms within your main residence (property where you live)
  • Renting another buy-to-let property

Airbnb Hosting within Your Main Residence (Rent a Room Scheme)

If you rent out room within the property where you live, you will qualify for the Rent-a-room scheme. As a result, you will get a tax free allowance of £7,500 per year.

You will qualify for the scheme even if you don’t own the house or flat. Also, you will qualify even if you are running bed & breakfast or guest house as long as it is within your main residence where you are living and furnished.

Rent a Room Scheme

So, most of Airbnb landlords will qualify for the rent-a-room scheme for letting within their main residence.

You will not qualify for Rent a room Scheme in following cases:

  • If the accommodation is not within your main residence where you live
  • If the property is unfurnished
  • If the letting is for business use(e.g. for office)

The tax-free allowance of £7,500 is not an allowance on profits. It is allowance on gross rent receipts, i.e., total receipts before deducting any expenses. If your gross rent receipts are less than £7,500 in a tax year, you even don’t need to declare this in a tax return as the income is automatically exempt.

Note: The limit will reduce to £3,750 if two persons receive the income from the same property. For example, you and your spouse both receives income from the same property, each of you will be able to use allowance of only £3,750 instead of £7,500.

Options Available if Your Income Exceeds £7,500

If your gross rental receipts are more than £7,500, you have two options:

Calculate rental profits in the standard way, i.e., deducting all allowable expenses from the gross rental receipts. You pay tax on the net rental profits.

For example, suppose your total rental income in a tax year is £15,000 and you incurred total expenses (cleaning, electricity, meal, etc.) of £8,000 for the area you let. 

Your rental profits will be £7,000 (£15,000 income less £8,000 expenses), and you will pay tax on this profit.

Don’t deduct any allowable expenses, but instead claim £7,500 tax-free allowance. If you select this option, you are not allowed to deduct expenses.

You may be better off with Option 2 if your total expenses are less than £7,500. Otherwise, option 1 may be better. You can switch between these options each year. So, you may be better off with option 1 in one tax year while with option 2 in another tax year!

Airbnb Hosting in Buy to let Property

Airbnb Hosting in Buy to let Property

If you are hosting your Airbnb guests in separate house/flat (i.e. not within your main residence), you will not qualify for the rent a room scheme.

Unfortunately, you will not get a tax-free allowance of £7,500. In this case, you will be taxed on your rental profits like any other business. For example, suppose your total rental receipts in the tax year are £15,000.

You incurred total allowable expenses (such as gas, electricity, insurance, repairs, etc.) of £5,000, then your rental profits is £10,000, and you will pay tax on £10,000 based on your income tax rate.

However, please be aware that there is a severe restriction of deduction of interest as an expense from tax year 2017/18 if you don’t qualify as Furnished Holiday Lettings as explained below. 

Will Airbnb Hosting Qualify as ‘Furnished Holiday Letting (FHL)’ under UK tax law?

If you own a buy-to-let property which you let via Airbnb throughout the year, then you will most likely qualify for Furnished Holiday Letting.

To be eligible as Furnished Holiday Letting, you need to fulfil all of the

 following conditions:

  • The property must be available for letting as furnished holiday accommodation for at least 210 days in a tax year (or during the relevant 12 month period)
  • The property should be actually let for at least 105 days in the year
  • The property needs to be furnished (i.e. property must have sufficient furniture for usual occupation)
  • The property must be situated in the UK or the European Economic Area (EEA)

So, most of the Airbnb buy-to-let properties will qualify as Furnished Holiday Lettings. There are significant advantages of being qualified as FHL which we will explain below.

Will Section 24 (Restriction on Tax Relief on Interest) Apply to Airbnb?

Good news is many Airbnb landlords will escape dreadful Section 24 interest relief restriction because they will qualify as Furnished Holiday Lettings.

 However, if your property is not eligible as FHL, the section 24 will apply. The Section 24 restriction means you will not be able to claim full relief on mortgage interest if you are higher rate tax payer. 

For many buy-to-let landlords, moving from traditional long-term lettings to Airbnb may be significantly rewarding resulting from extra income and less tax!

Refer to our detailed guide on "interest relief restriction on section 24 on landlords" for more detail.

Are There any Extra Reliefs from Capital Gains Tax for Airbnb Landlords?

Most of the reliefs depend on whether you qualify as ‘Furnished Holiday Letting’ business or not.

capital gains tax relief

If you qualify as FHL, there are many capital gains tax relief available:

Investors Relief

When you sell your FHL property, you will be eligible for Investors relief. And, capital gains tax rate will be only 10% instead of normal 28% for higher rate residential landlords. Just think how much you will save by paying 18% less in your capital gains!

However, there are various conditions you need to meet and careful tax planning from property tax specialist is required to avoid the risk of losing such huge tax advantage. As property tax experts, we are happy to help you on this.

Rollover Relief

If you sell your existing Airbnb property and purchase another Airbnb property, you may be able to defer capital gains tax on the sale of existing property. You don’t pay any tax now! In most of the Airbnb property qualifying as FHL, this relief is available.

However, as with Entrepreneurs relief, there are various conditions you need to meet, and so it is best to discuss with property tax expert for tax planning in advance of the sale.

Other reliefs from Capital Gains Tax

If you sell your existing Airbnb property and purchase another Airbnb property, you may be able to defer capital gains tax on the sale of existing property. You don’t pay any tax now! In most of the Airbnb property qualifying as FHL, this relief is available.

However, as with Investors Relief, there are various conditions you need to meet, and so it is best to discuss with property tax expert for tax planning in advance of the sale.

Gift Relief

Under this relief, the FHL owner does not pay Capital Gains Tax liability and the gain is held over when it is gifted to the charity, as long as the charity meets certain criteria.

The charity will have a base cost deducting the held-over gain from the market value and will pay capital gains tax when sold. This can provide a significant tax saving, as Capital Gains Tax is currently levied at a rate of up to 28%.

Are there any other tax advantages of being Airbnb landlord?

Fortunately, yes. 

There are many benefits for Airbnb landlord compared to typical buy-to-let landlords if you meet the conditions of Furnished Holiday Letting as describe above. Below are some of those advantages:

  • Any rental profits are treated as ‘Earned Income’ similar as any other self-employed income. The typical rental income from the buy-to-let property will not qualify as ‘Earned Income’. The main advantage of this is that you will be able to make a bigger tax-free contribution to the pension scheme. The amount a taxpayer can pay into pension scheme depends on ‘Earned Income’ which does not include normal rental income.
  • Capital allowances will be available for the furniture, fixtures and equipment in the property. For typical buy-to-let landlords, this is not the case.
  • Interest on loan to purchase an FHL can be deducted in full from the rental income

You can get a comprehensive understanding of Tax on Rental Income UK on our full-fledged guide.

Do I Need to Charge VAT on Airbnb Letting?

Yes - you have to charge VAT.

This is one of the very important distinctions between normal letting and Airbnb letting. The residential rental income is exempt from the VAT in the UK.

However, Airbnb is classified similar as hotels rather than typical buy-to-let residential letting. Airbnb falls within the definition of holiday accommodation and so standard rated. This means you need charge VAT at 20% on the rent you charge your lodger.

But, don’t worry if your total income does not exceed VAT registration threshold which is £85,000 for tax year 2022/23.

 However, if your income exceeds the threshold, you need to register for VAT and file regular VAT returns to HMRC. The turnover for VAT includes the full amount you charged to the guest (including rent, meals, cleaning, etc.)

VAT rules itself are quite detailed and complicated, and so you may get an exemption on a certain type of letting.

For example, 

If the single letting is for more than 28 days, this can be claimed as exempt! So, you need to consult with property tax expert for further advice on this. 

VAT Implication on Airbnb Income

For many years, there has been uncertainty surrounding the VAT treatment of the Serviced Accommodation business in the UK. This type of lodging or accommodation service offers fully furnished properties or apartments for short-term stays, providing guests with essential amenities and utilities similar to a hotel room, along with the convenience of a fully functional kitchen, living area, and other household facilities – essentially, services provided through platforms like Airbnb.

VAT Implication on Airbnb Income

Notably, Serviced Accommodation businesses were significantly impacted by the normal VAT scheme. However, recently, a favourable judgment has been made in support of these Serviced Accommodation businesses.

The recent tribunal judgment on Sonder Europe Limited Case which gave the property let out business as Serviced Accommodation a sigh of relief.

This favourable ruling now allows Airbnb-like businesses to fall under the applicability of the Tour Operators Margin Scheme (TOMS), providing them with significant financial assistance along with tax compliance.

As a result of this recent development, Serviced Accommodation businesses can benefit from the advantages offered by TOMS, easing their tax burden while continuing to provide their valuable services to short-term guests.

Airbnb Landlords targeted by HMRC's One to Many (OTM) letter campaign

HMRC's One to Many (OTM) letter campaign is a tax compliance initiative aimed at identifying taxpayers who may not have declared all of their income or paid the correct amount of tax. One area that has been targeted by this campaign is income from short-term property letting, such as those listed on Airbnb.

If you have been renting out a property on Airbnb and have not declared this income on your tax return, you may receive a letter from HMRC as part of the OTM campaign as the one below:

Airbnb Landlords targeted by HMRC's One to Many (OTM) letter campaign(1)
Airbnb Landlords targeted by HMRC's One to Many (OTM) letter campaign(2)

The letter will ask you to review your tax affairs and make sure you have paid the correct amount of tax on your Airbnb income. If you do receive a letter from HMRC as part of the OTM campaign, it's important to respond promptly and take action to ensure your tax affairs are in order. Failing to do so could result in further action, including penalties and interest charges.

Learn more about Short-Term Property Letting Income on our comprehensive guide.

Book a session now!

If you receive the letter as shown above Please let us know about it & Get Peace of Mind by Filling out Our Assessment Form.

Warnings to Landlords in London!

The Greater London Council (General Powers) Act 1973 states that the use of residential premises for temporary sleeping accommodation (for less than 90 consecutive nights) is a change of use for all 32 boroughs of London, for which planning permission is required.

However, the good news is that the UK Government has relaxed this in Deregulation Act 2015 to promote Airbnb type lettings.

The new rule means that you can let up to 90 days in a calendar year without breaching this regulation. Airbnb automatically limits the number days for listing to 90 days. Read more about this on Airbnb website and UK Government website.

The tax implication of this is that you will not qualify as furnished holiday letting if you do not actually let for at least 105 days and the accommodation is not available for at least 210 days. So, if you want to qualify as furnished holiday letting and get all the tax reliefs, you must get planning permission.

Take Control of Your Airbnb Income Tax

Contact Us for Expert Guidance and Ensure Maximum Returns

Raju Gajurel
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