The tax advantages of being an Airbnb landlord

Dec 18, 2020

Before the coronavirus pandemic broke out, there was a shift going on in the UK rental market that saw increasing numbers of landlords moving from long-term to short-term lets.

After a series of unpopular tax and regulatory changes in the buy-to-let sector, many landlords saw platforms like Airbnb as an easier way to make money from their property.

In January 2020, ARLA Propertymark reported that 230,000 landlords were “likely” to switch to short-term lets, with 38% of those who had already done so citing burdensome regulations as the reason they had left the private rental sector.

Others said they were drawn to short-term lets by the greater flexibility they offered, and the potential for higher rents.

Then, as COVID-19 took its toll on the travel and hospitality sectors, we started to see that change reversed, with Airbnb landlords converting their properties for long-term use.

That’s not the end of the story for Airbnb, though. Despite the challenges of the pandemic, the company seems to be gradually recovering, and is now on its way to becoming publicly listed in the US.

So, if you’re considering starting up as an Airbnb landlord – or if you’re already hosting on Airbnb but want to make sure you’re not missing out – we’ve summarised the main tax advantages of using the platform.

Tax relief on your finance costs

As mentioned above, the last few years have seen several changes to the way buy-to-let income is taxed, and for some people that’s resulted in lower profits to be made from their property.

One of those changes was the reduction of mortgage interest relief. Before April 2017, it was possible for buy-to-let landlords to deduct their finance costs from their rental income, including mortgage interest payments, to reduce their tax bill.

That relief was gradually phased out and replaced with a basic-rate tax credit. In 2017/18, landlords could deduct 75% of their finance costs, in 2018/19, they could deduct 50%, and in 2019/20 they could deduct 25%.

As of 2020/21, landlords can no longer deduct any of their finance costs, and instead receive the 20% tax credit on them. For higher and additional-rate taxpayers, that could make a big difference to their tax bill.

These changes generally won’t apply to Airbnb landlords, as long as your property qualifies as a furnished holiday let.

Furnished holiday lettings

Your property should qualify as a furnished holiday let if it’s in the UK or the European Economic Area, has enough furniture for normal occupation, and is commercially let – so you have to intend to make a profit.

It also has to meet three occupancy conditions within the tax year:

  • Pattern of occupation: it can’t be let for more than 31 days to the same tenant without a gap in between. Specifically, the total of all lettings that exceed 31 continuous days can’t add up to more than 155 days.
  • Availability: it has to be available for at least 210 days in the year. Any days you’re staying in the property don’t count towards this.
  • Letting: it has to be let to the public for at least 105 days in the year. This doesn’t include days you let it to friends or family at a zero or reduced rate.

With COVID-19 restricting the possibility of letting in 2020/21, it is hoped that the Government will relax the rules. Otherwise, some landlords are going to find it difficult to qualify this year.

If the rules are not relaxed, you may be eligible to claim a period of grace election if the property qualified as a furnished holiday letting in previous years. If you have a number of properties then you may be able to make an averaging election, but it does mean you have to average 105 days over all properties.

Bear in mind that if your property is in Greater London, it may not be possible for it to qualify as a furnished holiday let, because of the 90-day limit on Airbnb bookings in that area.

If your property meets HMRC’s conditions, you’ll be able to deduct mortgage interest in full from your profits before tax, but you’ll also have several other tax advantages.

You’ll be able to claim plant and machinery capital allowances for items like furniture, equipment and fixtures. If you decide to sell the property, you may be able to use traders’ capital gains tax reliefs such as rollover relief, business asset disposal relief (formerly entrepreneurs’ relief) relief for gifts of business assets and relief for loans.

Plus, your profits will count as ‘relevant earnings’ for pension purposes, so you can benefit from tax relief when you use those earnings to contribute to a pension.

On the other hand, furnished holiday lets are not exempt from VAT, unlike standard residential rental income. If your turnover exceeds the VAT-registration threshold, which is £85,000 in 2020/21, you’ll need to register for VAT and file quarterly digital returns.

Rent-a-room relief

Alternatively, if you’re letting a room in your own home, you might qualify for the rent-a-room scheme, which gives you a tax-free threshold of up to £7,500 in 2020/21.

If someone else, such as a joint owner, receives income by letting accommodation in the same home, that threshold will reduce to £3,750.

The downside of the scheme is that if you’re using it, you can’t claim any expenses related to the letting – so if your property income exceeds the limit of the relief, you’ll need to work out whether or not the scheme is worth it for you.

To qualify, the accommodation you let out has to be a furnished part of your main home. You can’t use the scheme if you let your home while living abroad, and you can’t use it for business purposes such as office space.

The scheme is also unavailable if your home has been converted into separate flats.

If you qualify and your gross receipts from letting are under the rent-a-room limit, that income will automatically be exempt from tax. If your gross receipts exceed the limit, you can opt into the scheme through your tax return, or choose to stay out of it and deduct expenses instead.

Keep in mind that you can’t use this scheme at the same time as the £1,000 property allowance.

Speak to us about tax on your Airbnb property.

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