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AirBnb vs long-term-rentals

For the holiday maker & professionals alike, it’s safe to say that short-term let platforms - such as AirBnb, Flipkey, or Homeaway - have been a bit of a game changer.

This Guide was written by Iain Rankin, Landlord Tax Adviser at TaxKings Accountants. Iain now writes for Listentotaxman.com on matters relating to property tax and landlord tax. He is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.

This Guide was written by Iain Rankin, Landlord Tax Adviser at TaxKings Accountants. Iain now writes for Listentotaxman.com on matters relating to property tax and landlord tax. He is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.

Think back 4-5 years - you’re going abroad. Now sure, you could book a BnB abroad, but only on a reliable recommendation. Often, forking out for a hotel seemed like the simplest/safest option. And even still, you weren’t always getting what you paid for with a hotel.  Fast forward to 2019, and with a bit of hunting on your smartphone, you can find yourself whatever kind of property you’d like. Often, it’s cheaper than a hotel & can often add a personal touch.  For the holiday maker & professionals alike, it’s safe to say that short-term let platforms - such as AirBnb, Flipkey, or Homeaway - have been a bit of a game changer.

It’s starting to look like short-term letting might be a bit of a game changer for property owners, too. If you’ve read my latest article – and you should - you’ll know that HMRC have been clamping down on traditional long-term rental landlords in recent years. More and more often, I’m being asked about the benefits of AirBnb vs long-term-rentals. Everyone seems to have heard rumours that it could save them some tax, and most want to know if it’s worth making the switch. The answer is simple: it depends.

Between 2016 and 2017, the number of properties on AirBnb increased by 54%. Exactly twelve-thousand-and-something-hundred-and-something properties were taken off the long-term-rent market in favour of short-term letting. 36% of landlords report that the reason they switched to short term lets was due to the changes in mortgage interest relief. With the restrictions being brought in in 2016, it’s safe to say that out of those twelve-thousand properties, over four-thousand properties were taken off the long-term-rental market purely for tax reasons. That alone should tell you something.

I know I’ve said this before, but I’ll say it again – you should read my previous article on Mortgage interest Restrictions.

But what else is at play? Should you make the switch too? Well, rather than trying to persuade you one way or another, here’s what we know at present:

Income

Before I dive in, I will say that the data on short term lets is a bit nuanced; be prepared for a few tangents.

If we were to base this purely on daily income, the short-term let is the clear winner.

Let’s look at London; a saturated market. According to the Residential Landlords Association, on average, short-term lets in the centre of London take in around £137 per night. A quick check of Gov.uk reveals that the median rent in London is £1,433 – working out at around £48 a night for long term rentals.

Although it is possible - it simply isn’t feasible for everyone to have their property let out 365 days a year without a long-term rental agreement. Even if you could, all the admin/cleaning/maintenance is (at the very least) a part time job. Or you could stick with the long term let and (let’s be honest) just turn up any time something breaks. They are two very different ways of making a living. Anyway, I’m a tax adviser, not a lifestyle coach - back to the data:

It can be useful to look at occupancy rates, but with more and more landlords switching to platforms like AirBnb, occupancy rates seem pretty low. This isn’t only due to market saturation; bear in mind that many landlords are only looking to let once or twice a month to make ends meet. Some let a full property, some a spare room. And some actually favour a low occupancy rate. All of this makes the official occupancy rates fairly unreliable to work with.

However, if you look around, you’ll see quite a few short-term-let management companies who promise pretty good occupancy rates for full-time landlords. For example, this article from Portico Host, claims that they expect to achieve 70% occupancy rates at the very least. Feasibly, a full time landlord could achieve similar results.

AirBnb released a report which confirmed that their average UK host earns about £3,000 a year. By comparison, private rentals earn £5,000-10,000 on average. Based on that, you’d be forgiven for thinking that a long term contract might be the most profitable approach, but again, AirBnb’s figure takes into account a wide range of Landlords.

As an experiment, why don’t we take a conservative daily income of £100, assume only 90-days-per-year occupancy and work with that? £100 per night, at 90 days a year yields £9,000 turnover. Quick maths.

In fact, you could make as low as £56 a night and still compete with the average private rental income of £5,000-10,000. Of course, the catch is that you can’t guarantee 90 people a year will book…

For this reason, it’s worth researching any available statistics in your area. As a matter of fact, some city councils are introducing restrictions. In fact, there is now a 90-days-per-year occupancy cap on short term letting in London, with hefty fines if you exceed the limits. In December 2018, Glasgow City Council also brought in new regulations on renting via AirBnb, with their first enforcement notice being issued on the matter in January.

How does the tax relief differ?

Tax-Deductible Expenses

Although the returns on short-term rentals tend to be much higher, it does come with more risks and more time commitment. There is also usually more maintenance too as you have tenants and guests coming and going all the time. This means more expenditure. Regular cleaning fees, service/management charges, repairs & replacements, advertising fees… Although these can also be incurred in a long term let, you can expect far more frequent expenditure with a short term let.

On the positive side, the wide range of tax-deductible expenses you can claim for short term lets can really help save on your tax bill. Think about it; replacing towels, bed linens, soaps, tea, coffee, cleaning equipment… generally these things are not supplied for long term lets, and wouldn’t be allowable. So when it comes to the year end, and you’re looking for ways to reduce your tax bill, you’ve got far more options on where to re-invest profits.

Mortgage Interest

For those who are still paying off their mortgage, being able to claim tax relief on your mortgage interest payments can really make a difference. As mentioned above, while private rental landlords are facing on-going restrictions on mortgage interest relief, short term lets are still able to claim tax relief on the full amount.

My last article already covered the mortgage interest restriction effects in detail, including the effects of the new tax-credit system.  So let’s take a look ahead and see how these changes play out in the coming years, once the restrictions are in full effect. From April 2020 private rental landlords will be unable to deduct any mortgage interest relief, and instead will get a 20% (basic rate) tax credit. So let’s look at how this will affect the short-term-let tax calculation.

We’ll take two landlords - Dr Long who rents on 12 month contracts, and Mr Short who has a furnished holiday let. After deducting expenses, they’ve both made £10,000 profit for the year. Both have paid £6,000 in mortgage interest.

As Dr Long is a higher rate taxpayer, she would no longer be able to deduct any mortgage interest – leaving her with £10,000 taxable profit. Instead she uses the new tax credit and can deduct £1,200 (20% of the mortgage interest) from her £4,000 tax bill (40% of £10,000).

Tax bill is thus: (£10,000 x 40%) - £1,200 = £2,800.

Mr Short is also a higher rate taxpayer. However, as there is no mortgage interest restriction on short term holiday lets, he claims the full £6,000 of interest to reduce his taxable profit to £4,000.

Tax bill is thus: (£10,000 - £6,000) x 40% = £1,600.

Quite a saving there for short-term let, for higher rate taxpayers at least. I should reiterate that we’re looking ahead to April 2020 here, but even in the present day the calculation still works out in favour of short-term let properties.

Now here’s the sneaky part. For those who are nearing the higher-rate tax threshold, the switch from tax relief to tax credit has some nasty tax implications. Previously, the mortgage interest would be deducted as an expense, reducing your rental profits. The mortgage interest tax credit is now applied after profit is calculated. Therefore, your total income will appear higher.

Suppose instead that Dr Long had a full time job, earning £45,000 a year – assuming that she is not based in Scotland, she will be a basic rate (20%) taxpayer. Now, reporting her additional £10,000 property income, before the deduction of mortgage interest, pushes her into the dreaded 40% tax band. Mr Short (with £4,000 profit) stays in the comfy 20% zone (£45,000 + £4,000 = £49,000).

Psst: Some mortgage lenders see renting a property as a breach of their terms. Nationwide, for example, does not allow a property to be let on AirBnb if it’s the owner’s only residence, whereas Santander will generally allow renting whole properties for a fee. Needless to say, it’s not advisable to breach your mortgage contract, so check your terms and proceed with caution.

Selling the property

Some of us are of course, looking to sell the property at a later date. When the time comes - providing you sell at a profit - you may have Capital Gains Tax (CGT) to pay.

If you meet the conditions to be a Furnished Holiday Letting, there are a few different CGT reliefs available. Firstly, there is ‘Entrepreneurs’ Relief’ which means that when you sell your property, the CGT rate will only be 10%. With higher-rate taxpayers paying 28% under normal circumstances, this is a significant saving.

Another is ‘Rollover Relief’ – if you sell off your existing AirBnb property to purchase another, you may be to defer capital gains tax on the sale of the existing property, so you don’t pay any tax at the point of the initial sale.

Important fact alert: the Furnished Holiday Let conditions require that the property is short-let for at least 105 days peryear, and is also available to let for at least 210 days per year. If you’ve been paying attention, you’ll have figured this out already; due to London’s 90 day rule, no London properties will meet these conditions. So if you want to qualify for this relief, err… don’t buy a place in London, I guess.

There are a number of other reliefs, but please bear in mind that with all relief schemes - including the above - there are various conditions you need to meet, and so it’s best to consult a property tax expert.

Rent a Room Relief

It’s worth noting that if you intend simply to rent a room in your primary residence, you may be eligible for rent-a-room relief. With this, you will get an annual tax-free allowance of £7,500 (or £3,750 if jointly let). If your gross rent receipts are less than £7,500 in the tax year, no tax is due. If the income exceeds £7,500 then you can either calculate rental profits in the standard way, i.e. deducting a percentage of allowable expenses from the gross rental income, or just claim the £7,500 tax-free allowance as a deduction.

 

Summary

As you can see, there are many good tax arguments in favour of short term letting and hopefully you’ve gained some insight about the major differences. As I said at the beginning, whether Air BnB is the better route really depends on your situation. There are pro’s and con’s to both approaches. If you go the AirBnb route, you may well save tax, but you’ll likely gain a lot more potential headaches, not least local council restrictions. Always make sure a property bought for short term rental would still be profitable with a regular tenancy. Ultimately, it’s up to you to decide whether you make the switch.

Closing thought: Even if you’re a landlord who favours long-let tenancies, platforms like AirBnb can be a useful tool to help bring in income if your property becomes vacant, or while your property is on the market. It’s worth remembering that you can have the best of both worlds.

This Guide was written by Iain Rankin, Landlord Tax Adviser at TaxKings Accountants. Iain now writes for Listentotaxman.com on matters relating to property tax and landlord tax. He is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.

This article was published in our Guides section on 28/06/2019.

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