Can you profit from Airbnb amid potential holiday let tax clampdown

Many landlords and second home owners have turned to holiday lets on platforms such as Airbnb amid slowing rental growth and extra regulations in the buy-to-let market.

Buy-to-let was once a very attractive investment with ultra low borrowing rates and relaxed legislation making it easy for property investors to purchase a second home to make extra income from.

But rising interest rates have seen buy-to-let mortgage rates double making it less of a lucrative investment opportunity. To add to the buy-to-let woes, landlords face a combined bill of nearly £18bn to improve their homes’ energy efficiency, and tax relief has also been reduced.

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The cost of living crisis has also hit tenants and limited the level of rent increases they will tolerate. Some analysts have even suggested that rental growth has peaked and will slow during 2024.

These factors combined have made buy-to-let investors question whether they should exit the property market.

Some investors have instead sought to cash in on their spare room or even a second home by listing it on Airbnb.

But owners of second properties that are rented out as holiday homes on platforms such as Airbnb could be a target of a tax clampdown on furnished holiday lets (FHLs) in the Spring Budget.

We look at the pros and cons of Airbnb and whether it can still allow you to make money from property investments.

The pros of Airbnb

Airbnb typically operates as an online marketplace for short-term holiday lets.

Hosts are able to rent out their entire homes, or just a room in their home. According to Airbnb, the typical host in the UK earns just over £6,000 per year, which is equivalent to two months of additional pay for the median UK household.

And people have turned to Airbnb to supplement their income as the cost of living crisis rages on.

Indeed, according to the site nearly four in ten hosts have said they use income from hosting on Airbnb to cope with the rising cost of living.

Letting out a single room affords you the convenience of staying in your home. But if you are going on holiday for example, you could let out your entire home and increase your fees.

Deciding how much rent you charge will depend on your location, such as your proximity to a city centre or attraction, transport links, and the time of the year.

If you’re hosting around a particular event, you can also increase the amount you charge as demand will be higher.

To get an idea of how much you can charge, you could look at comparable listings in your area.

Airbnb also recommends taking good quality pictures, such as in the daytime, to optimise your listing.

First-time hosts are also able to host an experienced guest who have good reviews on Airbnb. This might make for a good first-time guest, as you know they come with recommendations.

It’s not just hosts who get reviewed on the site – guests will also receive a rating out of five based on how well they treated the space.

For a full list of Airbnb’s hosting tips, you can check its site.

Additionally, if you are renting out a property as an FHL, you can still benefit from offsetting mortgage interest payments in full on your tax bill.

Buy-to-let landlords can only get 20% relief in comparison on a private rental property. 

The capital gains tax on an FHL is also reduced to 10% when the property is sold.

The cons of Airbnb

While some hosts are successfully making thousands of extra pounds a year on Airbnb, there’s also other technicalities to consider that could cost you money.

“Renting your property or a room within your property on Airbnb can be a good way to make a little extra cash – particularly with the current rising cost of living – but it is important to be aware of the tax implications of doing so,” says Shaun Moore, tax and financial planning expert at Quilter.

Holiday home owners could be the target of a new tax clampdown.

Chancellor Jeremy Hunt is reported to be planning to raise £300 million in his Spring Budget by scrapping some of the perks of FHLs such as being able to claim full mortgage interest relief and benefiting from a lower capital gains tax rate.

This could help fund a further NI tax cut, according to reports.

The government also is set to introduce new regulations for people renting out rooms or their properties on short-term lets through websites such as Airbnb. 

Under the proposed regulations announced in February 2024, homeowners would only be able to let out their own main or sole home for up to 90 nights a year before requiring planning permission.

A mandatory national register is also set to be introduced to record people offering short-term lets and to help ensure accommodation is safe.

This could add extra complexity and regulations to running an Airbnb property, although some parts of the country such as London already have the 90-day limit.

Airbnb earnings are taxed as income, so you must pay tax on anything that goes over the £12,570 personal allowance.

If you’re a higher earner, this could push you into a higher tax band, meaning it might not be the best option for you.

But the rules are different if you rent a room in your home.

“The government offers rent a room relief which allows you to earn up to £7,500 per year tax-free when you let out furnished accommodation in your main residence,” says Moore. “You can let out as much of your home as you wish, but in order to be eligible you must be a resident landlord or run a bed and breakfast or guest house.”

“If you are not eligible for rent a room relief, you can still receive £1,000 property allowance against rental income and there may be other additional tax relief options available to you,” continues Moore.

“For example, if the property is not your main residence and qualifies as a furnished holiday letting then you may be entitled to other capital gains tax (CGT) reliefs such as business asset disposal relief which can reduce your CGT rate to 10% when you sell your property.”

You should also look into the terms of your mortgage to ensure it allows you to rent out a room in your property.

Some lenders might just need to be notified, while others might up your payments and others could refuse it altogether – although if you’re only renting out a room on a casual basis, the latter scenario is unlikely.

Make sure you’re covered by your insurance. Some insurers might not cover damages caused by short-term lettings, while some will.

Airbnb does offer host damage protection, which provides hosts with up to $3m in coverage should your place get damaged by a guest. This overs damage to your home, furnishing, or valuables as well as unexpected extra cleaning costs.

But Airbnb stresses that this is not an insurance policy – and encourages host to purchase additional security as well.

Finally – you need to consider you’ll be sharing your home with a stranger. Airbnb allows you to set out clear house rules, but you’ll have to be comfortable with opening up your space to someone you haven’t met before.

If you’ve considered all the pros and cons, overall letting out your spare room on Airbnb could be a good way to make some extra cash.