Airbnb and other short-term lets

In April 2023 the government launched a consultation on how to regulate the short-term letting market. Fortunately, one area which wasn't under discussion is tax. There’s already an established system for declaring income and expenses to HMRC. However, it’s not uniform for every landlord.

Are you in business?

A key factor that determines the tax deductions you’re allowed is whether the letting counts as as a business (a furnished holiday let (FHL) ) or just property rent. To qualify as an FHL you must make it available for letting and actually let it for a minimum number of days each year.

Tip. Potentially more generous deductions for costs are allowed compared with those for non-FHL rental income. For example, you’re entitled to claim full tax relief on interest and other finance costs which are usually subject to restrictions. There are also capital gains and inheritance tax advantages. FHL status can apply to Airbnb-type arrangements where you let all or part of your home or a separate property.

Rent-a-room relief

If you let part or all of your home while you’re temporarily absent, rent you receive will be tax exempt if the income is no more than £7,500. If you own the property jointly with one or more other persons you’re each entitled to half the exemption, i.e. £3,750 each. If the total rental income exceeds £7,500, you can choose to deduct either the actual letting-related costs or the rent-a-room relief amount.

Elect for maximum tax saving

You can choose whether to use or disapply rent-a-room relief from year to year depending on which is more tax efficient in your circumstances, but you’ll need to make an election. For example, if your expenses exceed your income, i.e. you make a loss, for one tax year, opting out of rent-a-room relief will generally be more tax efficient because the loss can be used to reduce taxable income from other rental properties in the same or later years.

The property allowance

There’s another special tax allowance for rental income that’s specifically for anyone who receives small amounts of rent from property, it’s called the property allowance. With minor differences, it works in a similar way to rent-a-room relief but is only £1,000 and it can be claimed only where rent-a-room relief or FHL status doesn’t apply.