Airbnb hosts are not affected by the new buy-to-let tax rules

Have you heard of the new rules regarding the tax deduction on mortgage interest for buy-to-let (otherwise known as an investment property to the rest of the planet)  in the UK? The recent announcement by the UK government that tax relief is going to be limited to 20% has just been made clearer by some of the details. You can read this article in the Telegraph for further details: http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11914142/Will-my-holiday-home-get-hit-by-the-new-buy-to-let-tax.html The main point is Airbnb hosts could be exempt from the new rules and still be able to claim the full tax deduction. This will come as some relief for many an airbnb host including me. The general reason for this is that the government is considering "furnished holidays lettings" as a business and not just and investment. To qualify as a furnished holiday let the government has provided some criteria:

  • The accommodation must the in UK or EEA (part of the Eurozone) and be commercially let
  • It has to be furnished
  • It must be available for let at least 210 days of the year
  • It must have been let for at least 105 days
  • It cannot be let for a single trip of more than 155 days
For most hosts the above criteria will be no issue at all. The new rules do make some sense. Those hosts who are letting for less than 105 days of the year will most likely be claiming the rent-a-room scheme allowance and not be claiming any deductions anyway. These changes only take partial effect in 2017 and not fully implemented until 2020 so a little planning should see you right.

The UK emergency budget July 2015 and how it affects Airbnb Hosts

There were some changes in the UK emergency budget this year that took many by surprise including me. The changes are not directly aimed at Airbnb hosts but will affect anyone who derives an income from property in some way. 1. The increase in the rent a room tax free allowance from £4250 to £7500 a year from April 2016 is excellent news for Airbnb hosts. Hosts earning £7500 or less will not need to declare any income to HMRC. 2. The end of the 10% wear and tear allowance for landlords (a non-cash deduction on gross rent) will end in April 2016. 3. A phased withdrawal of tax relief on mortgage interest for landlords for deductions above the basic rate of tax (basic rate is 20%).

For any Airbnb hosts who generally take in less than £7500 a year the changes are good news as there will be no tax to pay on all the income. However if your Airbnb income is greater than £7500 and you are relying on the wear and tear allowance and mortgage interest deductions to cut your tax bill then this is bad news.
[caption id="attachment_163" align="aligncenter" width="540"]Tax deductions from your Airbnb income have changed Tax deductions from your Airbnb income have changed[/caption]

The End of the Wear and Tear Allowance

The elimination of the 10% wear and tear allowance is expected to be replaced by a system of keeping recipes for expenses, like say if you bought a new lamp for the listing bedroom you could claim that as an expense. I personally preferred the wear and tear allowance to the expenses system as smart buying and maintenance of  furniture and other items meant that it was theoretically possible to claim greater depreciation expense (wear and tear) over a longer period of time.

Mortgage tax relief for landlords restricted to the basic rate of tax

Possibly the biggest change in a generation is the end of mortgage relief for landlords at a higher rate than the basic rate of tax. Obviously you are unaffected if you only pay tax at the basic rate but most landlords will be in the higher rate of tax especially in the south east. Possibly for the first time in recent memory we will see a real reduction in the amount of investment capital flowing into the property market as the sums for many investors simply will not add up. For more explanation of the end of mortgage tax relief see this article from thisismoney.

Do I need to pay tax on my income from Airbnb?

[caption id="attachment_111" align="aligncenter" width="729"]What tax do i need to pay? What tax do i need to pay?[/caption]

Hotel Tax

In the UK there is currently no hotel occupancy tax and to my knowledge no intention to introduce one.

VAT 

VAT is payable on Airbnb’s service fee (collected by Airbnb at the time of booking so nothing for you to do here) but no VAT is currently chargeable on rent in the UK. If such a time comes the government decides that money earned from Airbnb is no longer rent but a service fee then VAT may become payable. [caption id="attachment_110" align="aligncenter" width="335"]You will need to pay tax on your airbnb income You will need to pay tax on your airbnb income[/caption]

Income Tax

Income tax is payable on any earnings in the UK. There are very few instances where income tax is not payable on any form of earnings in most countries. You are kidding yourself if you think that profits earned from renting out rooms or anything else is not liable for some form of tax. This is just the world we live in. You pay income tax at your marginal rate (this means on top of any other income you earn for example your job). So if your already earning £40,000 a year from your employment then you could be paying income tax at 40% or more on your Airbnb income.

The Rent a Room Scheme

The Rent a Room Scheme is a UK tax free allowance when you rent a room in your house to a third party. This is applicable to ‘Shared room’ listings but no to ‘Entire place’ listings on Airbnb (that is unless is it usually your main home). The Rent a Room Scheme lets you earn a tax free allowance of £4,250 per year. So if you earn less that £4,250 for your Airbnb lettings portfolio then you are in the clear and owe nothing. If you earn more that £4,250 from your Airbnb listings then your going to want to start claiming some deductions to bring your assessable income down. The government has recently announced the intention to increase the rent and rooms scheme allowance to £7500 from April 2016.

Tax Deductions

1. A Wear and tear allowance 10% of rent (Soon to abolished in April 2016) 2. Other Tax Deductable costs incurred from running your Airbnb listing might be:
  • accountants’ fees
  • buildings and contents insurance
  • interest on property loans (for example your mortgage)
  • maintenance and repairs to the property (but not improvements)
  • utility bills, like gas, water and electricity
  • rent, ground rent, service charges
  • Council Tax
  • services you pay for, like cleaning or gardening
  • other direct costs of letting the property, like phone calls, stationery and advertising
Of course you can hire your Auntie Doreen to be your cleaner/receptionist/accountant and pay her a tidy sum for a hours work and claim that on your expenses too.

Apportioning your income and expenses

If you are a live-in host then your going to need a apportion some of your expenses (for example your mortgage interest) depending on what percentage of the house is yours exclusively and what percentage was used by your guests. The generally acceptable method is by square footage of the property.

Capital gains tax

Theoretically you could also be liable for future capital gains tax if you are taking in more than one lodger at a time - Private Residence Relief and Letting Relief.  

What will Airbnb charge me as a host?

Airbnb takes a commission for every booking your listing has. However how much of a cut depends slightly.

What fee do Airbnb hosts Pay?

Airbnb says it takes 3% of the hosting fee plus VAT (in the UK 20%) so If you charge £100 per night then the hosting fee will be £3.30. See here for more details on Airbnb help section.
note - Airbnb will round up it's figures so if your hosting fee is £6.60 this will be rounded up to £7.
[caption id="attachment_125" align="aligncenter" width="691"]Airbnb charges hosts a percentage of the listing price per night Airbnb charges hosts a percentage of the listing price per night[/caption]

Airbnb guest fees

The guest also pays a fee of 6-12% of the total price called the guest service fee. Which listing pay 6% and which pay 12% you ask? I am not sure and to my knowledge Airbnb has not revealed this information. Most of the listings I have checked hover around the 14% mark the lowest I have seen was 8% and that was on a shared room for £10 a night. [caption id="attachment_123" align="aligncenter" width="723"]Airbnb can pay hosts via Paypal or Direct Credit into your bank account Airbnb can pay hosts via Paypal or Direct Credit into your bank account[/caption]

Airbnb payments via Paypal

Airbnb will pay you your hosting money the day after the guest checks in. There are several methods of payment to choose from however the main two are via Paypal or Direct credit into a bank account. What's important here is the time it takes for the money to reach you. If your getting paid by direct credit into your account then this can take up to 5 working days (occasionally longer in my experience) however Paypal takes only a couple of hours if not instantly. You can then transfer into your bank account and have the money in a couple more hours after that. There are two major reasons why you might want to choose Paypal instead of Direct credit into your bank account. The first being the time it takes (Paypal can take only a couple of hours versus 5 days or more for direct credit). The second could be tax planning. You might want to consider that Airbnb is a US company and will be collecting its revenue in US dollars. It will then need to convert that money to GBP to pay you.