Even with the Coronavirus pandemic, Airbnb hosting doesn’t seem to be declining, and the company recently became publicly listed in the US. Airbnb remains an easy way for landlords to rent out their houses and get a little cash.
However, the guidelines on tax payment and benefits for Airbnb landlords are unknown to many people in the UK. This means you may be unaware of the benefits you stand to gain from being a host on Airbnb.
There are two categories to the tax treatment and relief system of Airbnb hosting income:
- Those that rent furnished rooms in their main residence or property where they live
- Those that rent other buy-to-let properties
Rent a Room Relief Scheme
The rent-a-room scheme applies to those that rent out a room in the property where they live. This scheme will give hosts a tax-free relief of up to £7,500 yearly. It provides some allowances by allowing you to qualify as long as it is within the main residence you live and furnished even if:
- You are not the owner of the flat or house.
- You run a guesthouse or bed and breakfast.
You don’t qualify for the rent-a-room scheme when:
- The accommodation is not part of the main residence where you live.
- You let out the property for business use.
- The property is not furnished.
- Your home has been changed into separate flats.
However, it is essential to note that the £7,500 allowance is not for profits; it is an allowance on gross rent receipts. This means that it applies to the value of the total receipts before you remove your expenses. So, if your gross rent receipts are lower than £7,500 in a year, there is no need to declare it in a tax return as the income will be exempted automatically.
If two people receive income from the same property, this relief will reduce to half the value – £3,750. You also cannot charge any letting-related expenses if you use this scheme, and you will have to decide where it fits into your tax schedule.
The micro-entrepreneurs allowance scheme was set-up by the UK government to help micro-entrepreneurs let out their properties. It also covers individuals trading on websites like Airbnb.
This scheme’s recipients can remove a £1,000 Micro-Entrepreneurs allowance against their gross income to get to their rental income figure. This is done instead of several calculations and subtracting the incurred expenses to get to their taxable profit. However, you cannot claim the Micro-Entrepreneurs Allowance on the same income as the Rent a Room Relief scheme.
Furnished Holiday Letting
Your building should qualify as a furnished holiday letting if you have a property in the European Economic Area or the UK with adequate furniture for normal occupation, and it is a buy-to-let property. Many of the benefits of being an Airbnb host depend on if your building qualifies as a furnished holiday letting. Your building needs to fulfil the following conditions to qualify:
- The property must be furnished enough for occupation.
- The property should be available as furnished holiday accommodation for a minimum of 210 days in a tax year. Days which you live in the property cannot be counted.
- You must let the property out to the public for a minimum of 105 days in a tax year.
If your property adheres to the above conditions, you will benefit from the following tax benefits.
Exemption from Section 24
In 2015, Section 24 of the Finance Act was passed, which placed restrictions on the tax reliefs landlords had access to. This made it so that landlords could not claim full relief on their mortgage interest if they’re higher rate taxpayers.
Since the 2016/2017 tax year, the relief has been phased out gradually, and a basic rate tax credit has been put as a replacement. In previous years, landlords could deduct 100% of their finance costs from the rental income, which included mortgage interest payments to decrease their tax bill. In the 2017/2018 tax year, it reduced to 75% of their finance costs, 50% in the 2018/2019 tax year and 25% in the 2019/2020 tax year.
Presently in the 2020/2021 tax year, landlords can no longer remove any of their finance costs from their income; they can only get a 20% tax credit on them. This number could rack up and become a lot for additional-rate and higher taxpayers.
Airbnb landlords do not need to worry about this as it does not cover properties that are furnished holiday lets.
Anytime you sell a property that is considered a Furnished Holiday letting, you will qualify for the Entrepreneur’s relief. This relief will give you a capital gains tax rate of 10% instead of the regular rate of 28% for other higher rate residential landlords. You might need to carefully plan your tax with specialists and meet several conditions to benefit from this advantage.
If you sell your Airbnb property and buy another Airbnb property, you might have the opportunity to hold off capital gains tax on the sale you made of an existing property. This allowance is available in almost all of the Airbnb properties that qualify as a Furnished Holiday Letting. However, just like Entrepreneurs relief, you might need advice and consultation from a professional.
Use Rental Profits as Earned Income
Just like other self-employed income, you can use the rental profits as “Earned income.” However, the normal rental income gotten from buy-to-let properties will not classify as Earned income.
The biggest benefit from this is you will have the opportunity to make larger tax-free contributions to the pension scheme. The amount that taxpayers can pay in a pension scheme is dependent on “Earned Income,” and this does not cover normal rental income.
COVID has put some restrictions on letting for the 2020/2021 tax year, so there is hope that the Government will relax some of the rules guiding the reliefs.
However, the best way to stay on top of all developments is to remain updated on all the new laws and changes that might start to roll out in the coming months.