Looking to rent on Airbnb? Here’s what you need to consider.

With Airbnb becoming an ever more popular way of earning a few extra pounds, here are the varying tax positions you may need to consider.

If you are new the the letting markets, it would be easy to assume that all income would be taxed in the same way… you’re wrong! Depending on the type of property you are letting out to your clients, the reliefs you are entitled to will depend on the type of property and in some cases, whether Entrepreneur’s Relief is available.

Furnished Holiday Lets (FHL)

The first thing to consider is your target clientele, are you aiming for short term lets, more suitable to holiday goers, or long term tenants? If is short term, it may be worth considering the extra effort to ensure it qualifies as an FHL.

An FHL is a property that is fully furnished and available to be let for 210 days and actually let for at least 105 days on a short term basis. A short term let is a period of no more than 31 continuous days to the same client.

The benefit of this is a wider range of deductions that can be used to minimise your taxable profits. One of the major advantages is the ability to deduct the whole of any qualifying mortgage interest payments from your gross income, rather than it being used as a tax reducer at basic rate.

An FHL also receives Capital Gains Tax Advantages by the way of Entrepreneur’s Relief. As FHL’s qualify as a business, any disposal of the property would result in the potential gain being taxed at 10%, compared to plain rental properties being taxed at 18% or 28% depending on your level of income.

Rent-a-Room Relief

Where you are renting out a room/rooms in your home, you are entitled to a tax exempt amount of up to £7,500 (current tax year). Where you share ownership of the property you are only entitled to half of the exemption amount (£3,750), however the income would be split accordingly.

Should your rental income exceed the exemption amount, an income tax could be chargeable. You can choose which was you will be assessed, either deducting the rent-a-room exemption amount, or the actual costs related to letting the room out.

If you select the rent-a-room relied for one year, it does not apply for all years going forward. The relief is selected year on year and you can choose whether to apply it depending on it’s tax efficiency each year. It is worth considering in years where the expenses have been high and could potentially produce a loss, which can then be carried forward for future years.

Property Allowance

Each taxpayer can receive a property allowance of £1,000 each year. This is aimed at individual who have small rental income levels and provides them with an initial tax free amount. The allowance can only be applied where rent-a-room relief is not claimed, or to FHL’s. As with rent-a-room relief, it should be considered whether the expenses of the letting the property out are more than the property allowance.