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Airbnb and Income Tax - Do you Know the Facts?

Initially viewed as a way to facilitate students sofa-surfing their way around the world, Airbnb now attracts listings from a wide variety of people, including young professionals struggling to cope with increasing rents. Although it can be a great way to earn extra money, some people are concerned about the income tax implications involved in doing so. While the exact figures will depend on your individual circumstances, we created a handy general guide below should you decide to take the plunge! 

Tax on rental income 

You must normally pay income tax on any profit you make from renting out a property in your ownership. Your profit is the sum left once you deduct any ‘allowable expenses’ from your total rental income. Allowable expenses include:

  • Council tax
  • Mortgage interest payments (although capital mortgage payments are non-deductible)
  • Utility bills
  • Costs for services such as cleaning and gardening
  • Contents insurance
  • Repairs and maintenance (but not improvements)

The expenses should be incurred wholly and exclusively as a result of renting out your property. In addition if you let your home fully furnished, which is usually the case when renting via Airbnb, you can also claim a 10% wear and tear allowance. 

Your profits will be taxed at the same rate as any income you receive from your business or employment – that is at 20%, 40% or 45% depending on your tax band. 

However if you are using Airbnb to rent out a room in your only or main home (as 80% of hosts in the UK do) you can use a scheme known as “rent-a-room relief’ to receive up to £4,250 gross income tax-free. This figure is set to increase to £7,500 from 6 April 2016. 

Rent-a-room relief

To qualify for the relief, you must provide furnished residential accommodation in your only or main home. If you decide to up your ante as a host and offer, and receive payment for, services such as providing meals, cleaning or laundry these payments must be added to the rent received and you cannot deduct expenses. The tax-free limit may be halved if someone else receives rent from letting out the same home. 

If you earn less than £4,250 in a tax year from renting a room in your home, you will be exempt from tax under the rent-a-room scheme. If you receive more than this, you can choose to either:

  1. Pay tax on your profit in the usual way for rental income as described above, or
  2. Pay tax on your gross income less £4,250 with no allowance for expenses

To work out which option is better for you, calculate your allowable expenses. If these are less than £4,250 you will be better off using the second option. You can switch between the different options from year to year but you will need to inform HMRC. It is worth noting that option 1 automatically applies unless you tell HMRC you wish to use option 2. 

Reporting your income

If your home proves to be a hit on Airbnb and you receive more than £2,500 in rental income in a tax year, you will need to register for self-assessment (if you have not already done so) and your income will need to be reported on a tax return. If your income from the rental is less than this, you will still need to inform HMRC that you are renting your property but you may not need to complete a full tax return. It is best to check your position with HMRC in these circumstances. 

You must register for self-assessment by 5 October after the end of the tax year you started renting your property in and pay any tax you owe by 31 January following the end of the tax year. 

Other points to consider

There have been several stories in the news of Airbnb hosts being fined, sometimes substantial sums, for renting a room in contravention of local laws. It is worth checking that there are no such restrictions in your area. You should also check:

  • If your lease allows you to take in a lodger if you rent your home
  • If your lender allows you to take in a lodger if you have a mortgage on your home
  • If your insurance company will allow you to do so and if so whether your current cover is sufficient 

For individual advice on issues around Airbnb or other tax areas, contact partner Tessa Till on ttill@pagan.co.uk or 0131 624 6814.

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