Airbnb: Tax Overview - www.rossmartin.co.uk

What expenses can Airbnb owners claim for tax purposes? How is income taxed? Can you claim Rent-a-Room Relief? How does it affect Private Residence Relief? What are the VAT rules?

Our checklist for subscribers.

At a glance

This guide takes a look at how homeowners who let all or part of their UK property as an Airbnb are taxed. It does not deal with overseas properties and specialist and local advice should be taken where the let property is located abroad.

In some cases where the activity does not in itself amount to a trade (i.e. it is a property business), the conditions for Furnished Holiday Letting (FHL) treatment may be met. See Overview tab.
Income from Airbnb is generally rental income.
The trade must be run on a commercial basis for Loss Relief to apply.
The provision of holiday accommodation is standard-rated for VAT purposes.
Whether or not an Airbnb business is eligible for Inheritance Tax Business Property relief depends on the level of services provided and all factors considered in the round. See Overview tab.

Overview

Furnished Holiday Lettings (FHL)

In some cases, the conditions for Furnished Holiday Lettings (FHL) may be met although if only seasonal letting is available, the requirement for the accommodation to be available and let for 210 days a year may not be achievable. If the property does qualify as an FHL:
- Capital allowances can be claimed instead of the replacement of domestic items relief (see below).
- Business Capital Gains Tax (CGT) reliefs may apply (see below).

Business rates & holiday letting

Following a consultation ‘Business rates treatment of self-catering accommodation’ in England from 1 April 2023:

A 140-day availability and 70-day letting condition, both applying to the previous year, will be added to the Business Rates qualifying criteria.
Where these conditions are not met, Council Tax, rather than Business Rates will be payable in respect of the property.
A similar 70-day letting condition was introduced in Scotland from 1 April 2022.

See Furnished Holiday Letting

Consultation: Business Rates and self-catering accommodation in Wales

In March 2022, the Welsh Government published 'Consultation on draft Non-Domestic Rating (Definition of Domestic Property) (Wales) Order 2022'. The order came into force on 14 June 2022.
This Order amends the criteria for self-catering accommodation to be liable to Business Rates rather than Council Tax.
From April 2023, the availability requirement is 252 days (previously 140) and the letting requirement is 182 days (previously 70).

See Consultation: Welsh holiday lets and Business Rates

Cases relevant to letting and holiday accommodation

Inheritance Tax (IHT)

Reliefs available to Airbnb owners

Business Property Relief (BPR) will apply if there is a business that is not one of wholly or mainly (over 50%) the making or holding of investments. Simple letting with no additional services provided will be treated as an investment activity.
See IHT relief cases below for when providing holiday accommodation has and has not been treated as a qualifying activity for BPR purposes. Generally, a high level of services needs to be provided for the courts to accept that the business is not one of wholly or mainly the making or holding of investments.

IHT relief cases

In HMRC v Nicolette Vivian Pawson (Deceased) [2013] UKUT 050, the Upper Tribunal decided that a Furnished Holiday Letting business did not qualify for BPR. The scale of the activities undertaken in conjunction with running the property business (cleaning, laundry, TV, light and heat) were more typical of the type undertaken by an investment business.

In Mr Bruce Firth & Mrs Rita Firth as Trustees of the L Bately 1984 Settlement v HMRC [2022] TC8542, the First Tier Tribunal (FTT) dismissed a claim for Business Property Relief. The services provided by the aparthotels in question were not sufficient to prevent it from being an investment business.

In Executors of the Late Sheriff Graham Loudon Cox vs HMRC [2020] TC07919, the First Tier Tribunal dismissed the taxpayer’s appeal for BPR on a holiday lettings business finding there was nothing exceptional about the business to elevate it beyond being one of mainly investment. The non-investment activities were so insignificant in scale as to be negligible and the ancillary activities such as cleaning, laundering bed linen and providing kitchen basics were an integral part of the provision of the accommodation and so were considered part of the business

In The Personal Representatives of Grace Joyce Graham (deceased) v HMRC [2018] TC06536, the First Tier Tribunal (FTT) agreed that BPR applied to a holiday lettings business. The level of services provided were just enough for it to fall on the 'mainly non-investment' side of the line. The deciding factors were the provision of a swimming pool, sauna, bikes for hire and in particular the personal care lavished upon guests by the owner's daughter.

In Anne Christine Curtis Green v HMRC [2015] TC04519, the letting of five self-contained holiday units did not qualify for IHT Business Property relief: the business was mainly one of investment. The guests were mainly left to their own devices and the services provided which included linen, Wi-Fi and laundry and caretaker services, were insufficient to demonstrate that the business was anything other than mainly investment.

Other relevant cases

In Julian Nott v HMRC [2015] TC04897, the First Tier Tribunal (FTT) decided that the letting of holiday units was different to operating a B&B or a hotel and so did not amount to a trade for the purposes of NICs or sideways loss relief.

HMRC treated the letting of the units as Furnished Holiday Letting (FHL).
The taxpayer did not agree. It was to his advantage to claim that his holiday units were a conventional trade, just like a B&B or hotel.
The tribunal reviewed the facts and was unable to find that the letting activities amounted to anything further than an exploitation by the taxpayer of his property. It concluded that his income was rental income and it was FHL income.

Capital Gains Reliefs

For an Airbnb to qualify for business Capital Gains Tax reliefs such as Rollover relief and Business Asset Disposal Relief it must meet the trading requirements which means that it must qualify as an FHL.
If it does not qualify as an FHL it is a letting business in the same way as a buy-to-let business and the only CGT relief which may apply is Private Residence Relief, and possibly Incorporation Relief if the business is being transferred to a limited company and all conditions for the relief are met.

Private Residence Relief (PRR)

Private Residence Relief may apply to any period before the property is used as an Airbnb if the owners have lived in it as their only and main residence (or elected it as their main residence if they have more than one).

If they remain in occupation and only rent out a room or rooms then PRR can continue to apply whilst the property is let. If an area is exclusively used by a tenant or lodger no PRR is due for that area, however letting relief may apply to this area instead as long as the owner remains in occupation. Relief for the let area is restricted to the lower of:
- The PRR due for periods when the property is not let and parts of the house are not exclusively let.
- £40,000.
- The gain relating to the period when the property is let, on a time-apportioned basis.
For periods when the entire property is let such that the owner cannot remain in occupation PRR will cease to apply.
If the property qualifies for some PRR then relief will also be available for the last nine months of ownership even if the whole property is let out at that time.

Income

Income

Income is primarily for the rental of the property and is taxed as rental profits.
If you offer extra paid-for goods and services these are also taxable. Rental income can include amounts received for any ancillary goods or services that are provided under a rental agreement. For example, items such as meals, laundry, Wifi/telephone/paid TV channels, etc. would be treated as rent.
If you take deposits for bookings (not including security deposits for damage/breakages) the amount should be recognised either:
- When the goods or services are provided.
- When it is reasonably certain that no goods or services will ever be provided and the deposit will be forfeited. You may then need to consider the VAT treatment. See Lost deposits and unfulfilled supplies
Security deposits are only taxed if they are retained because damage has been done and should be declared as additional rental income at the point of retention.

Rent-a-room relief

If you are only renting out a room in your own home you should be able to claim Rent-a-Room Relief provided that you meet the various qualifying conditions.
If your rental income is £7,500 or less, and the conditions for relief are met, then relief applies automatically. Your rental profit is then covered by the relief. You cannot then claim actual expenses as you do not have any income to offset these against.
An election can be made to disapply the relief and thereby claim actual expenses. This can be beneficial where a loss arises.
If your rental income exceeds £7,500, you may either:
- Claim the relief as a deduction from your rental income. You cannot also claim actual expenses.
- Pay tax on the rental profits (income less expenses) in the normal way that you would for a rental business.
You cannot claim Rent-a-Room relief as well as either the £1,000 trading and property allowances.

Trading and property allowance

From 6 April 2017, individuals have been entitled to two new annual tax allowances of £1,000, the 'Trading and Property Allowances'.

These cover small income from activities within the so-called 'gig economy' and can also include Airbnb income and miscellaneous income such as rural agency payments to farmers who no longer farm but continue to husband the land and certain income from cryptocurrency. There is one allowance for trading or miscellaneous income and one for property income.

See Allowances; Trading and property.

Expenses

The following expenses can be deducted irrespective of whether there is a trade or a let property business as long as it is run on a commercial basis.

Expense category	Key rules
Cost of goods bought for resale or goods used	Materials you consume in your business or sell to your customers e.g: Cleaning products. Consumables provided for or sold to guests such as tea, coffee, milk, sugar etc. Bedding, towels, crockery, cutlery etc assuming a life of less than two years. Items with a life of more than two years will be capital, see Repairs and maintenance below Costs of Clothing & Workwear if it is branded with a logo, such as polo or t-shirts and caps, or required for hygiene, health and safety. If you take any of these materials or other items from stock for your own use or consumption you will have to treat this as a sale at market value. There may be VAT implications i.e. if these items are standard-rated when sold.
Wages, salaries and other staff costs	If you hire staff i.e. cleaners, admin staff, maintenance staff, you should perform an Employment status check to decide whether your workers are your employees or self-employed. The gross wages, salaries or fees paid to your workers are tax-deductible. If you pay the employer's National Insurance you may be able to claim back the National Insurance employer’s allowance via your payroll. You cannot deduct NI if you have claimed it back. If your staff are employees you need to operate Pay As You Earn (PAYE) and deduct tax and National Insurance. You will need to use Real-Time Information (RTI) to report to HMRC. If you provide Benefits in Kind, the cost of those benefits and any Class 1A NIC will be tax-deductible. You may need to complete P11Ds to report benefits and reimbursed expenses. Accommodation provided to onsite workers will be a benefit unless it qualifies as Job-related accommodation. Provision of food and drink for workers will be tax-free if provided at the premises and to all staff. Pensions Auto-enrolment is now compulsory for employers.
Cars, van and travel expenses	Business Travel costs are tax-deductible. Home-to-work travel is not deductible if attendance at that workplace is 'regular and predictable'. Typically this would be if you travel between home and the property because you do not live on-site. The type of travel expenses that can be claimed depends on whether the business is claiming Flat (fixed rate) deductions or Actual costs. The type of expenses you claim and the rate of capital allowances will also vary depending on whether you are driving a vehicle that meets the definition of a car and private use. See Motor Expenses. Capital allowances cannot also be claimed if you are claiming fixed-rate deductions. Where claiming capital allowances, adjustments must be made for private use. Speeding, parking and congestion charge fines are not tax-deductible. Subsistence costs, where a meal or drink is bought during the course of business travel is tax-deductible. Accommodation costs are also allowable where the travel is allowable as business travel.
Rent, rates, power and insurance costs	Public liability, buildings and contents Insurance. Utility costs for any office you have. An allowance for the Use of your home for business can also be deducted if you are using the home as your office and for storage purposes. The type of costs that can be claimed depends on whether the business is claiming Flat (fixed rate) deductions or Actual costs. You can claim a flat rate with no evidence, or you can claim a calculated proportion of costs including a share of: Council Tax. Home Insurance. Mortgage interest or rent. Utilities and Water rates.
Repairs and maintenance of property and equipment	Assuming you do not have an FHL business: You cannot claim capital allowances on plant and machinery used in a dwelling house. You can claim the replacement, but not the original cost, of furniture and equipment, see Replacement of Domestic Items Relief (subscriber guide) such as: Beds, wardrobes, tables and chairs, sofas. Large kitchen appliances, televisions, blue-ray players or game consoles. The relief does not apply to fixtures such as fitted bathroom furniture or ovens, boilers or radiators; relief can be obtained on these as repairs unless they are capital improvements in which case a deduction is available when the property is sold. If you do have an FHL business: Capital allowances can be claimed on all of these items on purchase unless they qualify as repairs (see below) or costs of goods sold or consumed (see above) including the Annual Investment Allowance but not the structures and buildings allowance. Repair costs to furniture, plant and equipment, the property itself (subject to private use restrictions and to the repairs not being capital improvements). Whether your business is an FHL or not: The cost, repair and replacement of small items of equipment that will last less than two years can be claimed as an expense: Pots, pans, utensils. Kettles, toasters, grills, water heaters and small appliances. Internal signage.
Phone, fax, stationery and other office costs	Business use of mobiles and home phone. Pens, paper, ink, stamps, envelopes etc. used in the business. Trade magazines/periodicals used to keep you up to date. Subscriptions, IT costs and software used for your business, e.g. Bookkeeping and accounting. Administration and secretarial.
Advertising and business entertainment costs	Advertising in papers, magazines or online. Sky and other TV subscriptions. The costs of running a website. If the cash basis is not used, some website-related costs may be capital and so not allowable as revenue expenditure. This is likely to be the case where the costs create an asset of enduring benefit. Capital expenditure may be eligible for Plant and machinery capital allowances. See Website and e-commerce costs
Interest on bank and other loans	Cost of financing the purchase of the property itself, business equipment or working capital. Note the restriction to relief on mortgage interest, see Restricting mortgage interest relief (subscriber guide). This does not apply if the property is an FHL or is owned by a company. Costs of financing a capital contribution to a partnership.
Bank, credit card and other financial charges	Bank charges or credit card charges, where it can be shown they are business-related. Easiest to prove if there is a separate bank account for the business.
Accountancy, legal and other professional fees	Trade association fees and subscriptions. Accountancy fees. Legal fees unless they relate to capital items e.g. on the first purchase of the property and these are only deductible when the property is sold.
Other business expenses	The cost of training for a new qualification is a capital cost and is not allowable. Staff welfare costs such as tea, coffee and meals for workers.
Trading and property allowance	If the total of the above costs is less than £1,000, you can instead claim the Trading allowance, which is a fixed £1,000 deduction from profits. No other expenses can be claimed.

Where any costs have a private element, that part is not an allowable deduction. Particular care is required where there is mixed use such as when only part of your residence is let as an Airbnb.

VAT

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