Airbnb hosts and buy-to-let landlords may outwardly appear to offer a similar service but when it comes to taxation, there are significant differences.
As long as you meet certain conditions around availability and occupancy of the property, letting property on websites such as Airbnb will qualify as Furnished Holiday Lets (FHLs). Currently, the FHL tax regime sees FHL business owners receive beneficial tax treatment, due to them being short-term lettings and so more akin to a business rather than an investment letting. However, the government released draft legislation in July which will see the rules for FHL landlords align with those for other residential property landlords.
For businesses operating FHLs, the administrative impact of the changes is expected to be very little and reporting will also be simplified, as businesses will no longer calculate profits for FHLs separately. However, the tax benefits of the FHL regime can be significant when deciding how to set up your rental business.
A significant consideration for many is getting tax relief for their loan interest. Interest on loans to acquire the property receives different treatment for an FHL compared to a long-term let. A buy-to-let landlord would be restricted to basic rate (20%) tax relief on the payments, whereas an FHL landlord can get full relief on this even if they are a higher (40%) or additional (45%) rate taxpayer. But if you are looking to buy with an inherited legacy rather than borrowing, this may not be relevant for you.
Of more interest may be the ability to claim capital allowances on kitting out the property ready for occupation. A residential landlord can only get relief on replacing domestic items, whereas an FHL landlord may be able to claim extensive relief in the first year on furniture and equipment provided for the occupiers. This can make a big difference in the first year when expenditure is likely to be at its highest and income is yet to build up.
FHL income also qualifies as ‘relevant earnings’ when determining how much you can put into your pension and receive tax relief, whereas long-term letting income does not. This means you provide for your retirement more tax-efficiently with FHL income than buy-to-let income.
Lastly, the capital gains tax treatment of FHL properties is different than a residential let, so a lower rate of tax would be payable when the property is sold. This is not an immediate concern where you are looking to set up your business, and the rules can change immensely over time, but it is worth bearing in mind that you could pay tax at 10% on any increase in value on an FHL, but pay 24% on the disposal of the same property operated as a buy-to-let.
Next year, all of these beneficial reliefs for FHLs will be withdrawn, so you only have a few months to make the most of these tax advantages, which may well be impractical if you are looking to set up a new Airbnb business now. The advantage of this is at least there is a lot more simplicity in deciding how to operate your business, as the tax treatment will be the same either way.
It is also worth noting that these changes do not necessarily prevent your holiday business from being treated as a trade for tax purposes. It does mean that the automatic conditions are no longer enough, requiring a high bar of proof, and probable arguments with HM Revenue and Customs to secure beneficial tax treatment.
Finally, a reminder not to let tax be the driving factor. Many holiday lets can yield significantly more than long-term lets, so it would make no sense to achieve a 20% tax saving but lose out on 40% more income!
An edited version of this article recently appeared in the FT.
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