Airbnb and UK Tax

Summer has now passed, but it’s still difficult to walk through the centre of Edinburgh without encountering a large number of tourists.  Edinburgh is well served by hotels and guesthouses, but according to recent figures*, an increasing number of tourists are staying in properties made available for letting by local residents.  The Airbnb sector is booming and apparently, Edinburgh is now second only to London in terms of average revenue per room let.  This is no great surprise, given the year-round demand from tourists coming to Edinburgh.

This boom in short term holiday lets has not  gone unnoticed by HM Revenue & Customs (HMRC).  The question for us is, do these new property letting business owners understand the correct tax treatment of their letting income, and have they correctly  accounted for tax to HMRC?  If not, they face the prospect of being asked to make payments for earlier years, and there is also the possibility of additional interest and penalties.  The tax treatment of income from short term holiday lettings, such as Airbnb, can be different for individuals who simply let out a spare room in their house compared to those who let out a whole property.


Rent a Room Relief

Individuals who let out a spare room in their house can be expected to claim ‘rent-a-room’ relief.  This allows gross annual rents (i.e. before expenses) of less than £7,500 pa to be ignored for income tax purposes.  If annual letting income is more than £7,500, then exemption can be claimed for the first £7,500 of income, or the relief ignored and property letting expenses claimed.

However, ‘rent-a-room’ relief may not be available in all circumstances.  For example, it may not be available on a holiday home (i.e. a property that is not a main residence), or while an individual is absent from the property whilst working overseas.  The recent growth in the market for short term holiday lets throughout the UK may be one of the reasons for the UK Government launching a consultation on ‘rent-a-room’ relief.  We may hear more about the ‘rent-a-room’ consultation in this month’s UK Budget.  The Government has let it be known that they wish to see better support for long term lodgings so ‘rent-a-room’ relief in its current form may not be with us for much longer.  Should it be abolished, landlords will need to keep more accurate records of letting expenses.

In Scotland, the Scottish Government has begun a consultation, the results of which could mean that homeowners who want to list their property for more than 90 days will have to seek planning permission to change the use of the property from residential to commercial. Property owners in Scotland may also need to go through a licensing process similar to the current Homes of Multiple Occupancy (HMO) process. Either of these options would mean that homeowners who use Airbnb would face a local government fee.


Furnished Holiday Letting

Individuals who let out a whole property for holiday lettings may hope to enjoy the special tax treatment afforded to lettings that qualify under HMRC rules as a ‘Furnished Holiday Letting’ (‘FHL’).  The main condition is that the property needs to be made available as a holiday let for at least 210 days during the tax year and actually let for 105 of those days.  One of the most significant advantages of having a qualifying FHL is that it is possible to continue to claim mortgage interest relief in full against rental receipts.

A property that is, say, let out to students during term time but operated as a holiday letting property during the festive period and the Festival is unlikely to qualify for favourable FHL treatment.  Alternatively, it could be that a property that meets the conditions to qualify as a FHL is owned by an individual who is VAT registered.  Income from a qualifying FHL business is standard rated for VAT purposes and therefore, in the case of a FHL business operated by an otherwise VAT registered person, VAT at the standard rate will need to be applied to the rents charged.  Failure to do so could result in a large VAT liability and possibly penalties.


Property Allowance

It is also worth mentioning that a new property allowance of £1,000 applies from 6 April 2017.  When the gross rents from a property business are less than £1,000 pa, they do not need to be declared and no tax is due.  However, this new property allowance and ‘rent-a room’ relief cannot be claimed at the same time.

Some concerns have been expressed that the growth in the market for short term holiday letting property in Edinburgh is resulting in a shortage of housing stock.  However, the Airbnb market is here to stay as individuals either look to supplement their existing income or set up a new holiday letting business.  HMRC can be expected to be looking closely at this sector to make sure that they are receiving their share of the tax due on this income.


Sources: – 18 October 2017