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Getting yourself on the property ladder can be extremely rewarding. It’s also a great chance to earn extra income! You can do it full-time or as a side hustle alongside your other commitments.
Whether you’re thinking about putting your home on Airbnb or purchasing a property to rent out long-term, it’s worth keeping in mind that taxes will come into play no matter which route you choose (sorry).
Let’s take a look at the differences between being an Airbnb host and a buy-to-let landlord along with what it means for you in terms of taxes.
What is the difference between an Airbnb host and a buy-to-let landlord?
As an Airbnb “host” you can rent out your home to short-term “guests” – full-time or during peak seasons.
On the other hand, a landlord who buys a property to rent out typically does so for long-term purposes. Rather than listing the property on a website and having a variety of guests throughout the year, they tend to rent out to families or individuals for a specific period of time – usually outlined in a tenancy agreement.
Airbnb hosts have limited control over who stays in their property (although they can impose rules, for example, no smoking and no parties, etc), while landlords can select specific types of tenants to target, such as young professionals, students, or families.
How do I pay taxes as an Airbnb host?
You must declare any property or self-employed income if it exceeds your tax-free trading allowance, which is currently £1,000.
So, let’s say you rent out your property once a year when you go on holiday. You charge £70 per night over 7 nights – which gives you £820 in total. This is under the £1,000 threshold, so you don’t need to let HMRC know or pay any tax on this.
If you do go over the threshold, you’ll need to declare your rental income and register for Self Assessment by the deadline – this is 5th October following the end of the tax year you’re reporting this income from. Then you’ll submit your Self Assessment tax return.
Like most people employed or self-employed, you’ll be entitled to a Personal Tax Allowance which is currently £12,570 – anything over this will be taxed just like any other types of income.
It’s good to note that the tax you pay is based on your profits, rather than the total amount of income.
This means there are ways you can reduce your tax bill, including:
- On your Self Assessment, you’ll be given the choice of either claiming the trading allowance or your expenses. If your expenses are lower than the £1,000 allowance, then it’s more beneficial to claim the allowance instead – getting a bigger reduction on your tax bill!
- The rent-a-room scheme offers you the opportunity to rent your room out, earning up to £7,500 of tax-free property income – this isn’t available to all Airbnb hosts, but some fortunate ones can claim this
- You can also claim tax relief on cleaning services, utility bills, and mortgage interest payments for your Airbnb property
How do I pay taxes as a buy-to-let landlord?
As a landlord, you’ll pay tax on the profits you make from renting out your property. This is the amount you have left once you’ve added your rental income and taken away any expenses or allowances you’re entitled to claim.
Unlike an Airbnb property, mortgage interest payments are not tax deductible – but it’s worth noting that you’ll never pay VAT on buy-to-let properties.
The first £1,000 profit will be tax-free and classed as your ‘property allowance’ – similar to the trading allowance. As a landlord, you need to report your taxable rental profits to HMRC once you go over this.
If your income is between £1,000 and £2,500 and you don’t normally need to submit a Self Assessment tax return you can contact HMRC to tell them about your property income. You’ll need to submit a Self Assessment tax return though if your property income is:
- Between £2,500 and £9,999 after allowable expenses
- Over £10,000 before allowable expenses
Like an Airbnb host, you must register by the 5th of October following the end of the tax year you’re filing for. You can register as a sole trader, not self-employed or a member of a partnership.
Being a landlord, or an Airbnb host doesn’t mean you’re self-employed – although it may seem that way! How much you pay will depend on how much you’ve earned, and your personal circumstances.
The key tax differences between the two:
While both property types have an initial £1,000 tax-free allowance, only certain Airbnb’s can qualify for the rent-a-room scheme – offering an extra £7,500 tax-free income.
As well as the usual maintenance fees, Airbnb hosts can also claim tax relief on mortgage interest payments.
However, buy-to-let properties are VAT exempt, meaning only Airbnb hosts need to worry about the £85,000 VAT threshold.
Article written by Rachael Johnston at The Accountancy Partnership – Providing online accountancy services nationwide for a low, fixed monthly fee.
