Tax on Airbnb Income – All You Need To Know

Tax on Airbnb Income

Founded in 2007, Airbnb has come a long way. It is now a popular online platform among London landlords and also outside London. Do you know the initial idea was to provide a platform that allows people to rent out their spare rooms at a nominal fee? In most cases, people started to prefer this arrangement to get some passive income, and with the positive experiences of travelers who stayed in these rooms, Airbnb expanded exponentially. Due to the growing popularity of Airbnb, there is a rise in people curious to know about the tax on Airbnb income. So, if you are among them and keen to make some Airbnb income, it is better to make it clear that this income is taxable in the UK, and it can be income tax or value-added tax (VAT). Read the full blog to know the complete details.

Income Tax

Rent a Room Scheme

You are not required to declare your Airbnb income to HMRC if it is less than £7500 in a year. You are then qualified for the tax exemption as this is the tax-free threshold under the Rent a Room Scheme. This threshold gets halved when you share your Airbnb income with your partner or anyone else. Again if your yearly income exceeds the tax-free threshold, you must file a tax return. It is vital to remember that the Rent a Room Scheme is the scheme that enables you to earn some money by renting out a furnished room within your residence. The only condition is that you must be either a resident landlord, operate a B&B or run a guest house in the UK. Interestingly most Airbnb hosts qualify for this scheme.

Renting out in a separate house or flat

If the room you’re renting out for your Airbnb guests is within an accommodation, which is not your residence, you have to pay the tax on your rental profit just like any other business based on the income tax rate bracket that applies to you. You have to carefully calculate your rental profits by subtracting total allowable expenses from your total rental receipts. However, if your property qualifies for a Furnishing Holiday Letting (FHL), you can get some tax relief. In such a scenario, the section 24 interest relief restriction will be non-applicable. If applied, section 24 restriction can prove to be disastrous as this means that you can’t claim complete relief on your mortgage interest; in case you fall under the higher rate tax bracket. Now it is time to talk about the various tax reliefs you can enjoy when you host your Airbnb guests, in an FHL property. These are entrepreneurs’ relief, rollover relief, and many other reliefs from capital gains tax.

Value-Added Tax (VAT)

You have to register for VAT if your annual turnover exceeds £85,000. The standard rate for VAT is 20% in UK. You can charge VAT directly from your guests by asking for 20% on rent as this will help you to absorb the VAT cost. However, Airbnb hosts choose an alternate route and split this extra cost by a marginal increase in the rent. It is also important to note that VAT rules are complex and you may become eligible to get some tax relief under some specific conditions that you can easily find out by hiring a UK tax expert.

Also if you are using residential premises for hosting Airbnb guests in London, you may require planning permission. The best course of action is to consult a tax advisor who can give you the much-needed advice to navigate through all the complexities to save tax on your Airbnb income.