AirBnb vs long-term-rentals

*Please note the information in this article may be out of date

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.

Mon, 04 Nov 2019

There have been big changes to the holiday rental sector in recent years.  For the holiday maker and  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.

Let’s imagine it is 5 or so years ago, and you are planning to go abroad. Now you could book a B&B abroad, but only on a reliable recommendation. Usually, spending your money on a hotel seemed like the simplest and 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. Quite often it’s cheaper than a hotel and can often add a personal touch.  For the holiday maker and professionals alike, it’s safe to say that short-term letting platforms - such as AirBnb, Flipkey, or Homeaway - have been a bit of a game changer.

In addition to holiday makers, 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 our recent article on the HMRC Let Property Campaign   you’ll know that HMRC have been clamping down on traditional long-term rental landlords in recent years. More and more often we are 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. The favourite answer of tax advisors!

Between 2016 and 2017 the number of properties on AirBnb increased by 54%. 36% of landlords reported that the reason they switched to short term lets was due to the changes in mortgage interest relief. If you haven’t read it already, now would be a good time to read our previous article on the Mortgage interest Restrictions and Section 24 .

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

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

If you look around, you’ll see quite a few short-term let management companies who promise good occupancy rates for full-time landlords. 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 these figures, you’d be forgiven for thinking that a long-term contract might be the most profitable approach.  However, AirBnb’s figure takes into account a wide range of Landlords.

For example, let’s 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.  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.

How does the tax relief differ?

Tax-deductible expenses

In a lot of cases the returns on short-term rentals tend to be higher.  However, 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. Naturally, this means more expenditure. Regular cleaning fees, service/management charges, repairs & replacements, advertising fees and so on. Whilst these can also be incurred in a long term let, you can expect far more frequent expenditure with a short term let.

Nevertheless, the wide range of tax-deductible expenses you can claim for short-term lets can really help save on your tax.  Replacing towels, bed linens, soaps, tea, coffee, cleaning equipment…it all adds up.  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 your profits from letting.

Mortgage interest

Whilst private rental landlords are facing on-going restrictions on mortgage interest relief (Section 24), short term lets are still able to claim tax relief on the full amount.  Of course, you would need to make sure you satisfy the criteria as being classified as a Furnished Holiday Let (see HMRC’s guidance HS253, which explores the number of days the property should be let, how many days it should be available to let, and other conditions).

Let’s look ahead and see how these Section 24 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.

For the purposes of this example, we’ll look at 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.

Dr Long is a higher rate taxpayer, and under the new Section 24 rules, she can no longer 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).  Dr Long therefore has a tax bill of: (£10,000 x 40%) - £1,200 = £2,800.

Now let’s look at Mr Short.  He is also a higher rate taxpayer. However, as there is no mortgage interest restriction on furnished holiday lets, he claims the full £6,000 of interest to reduce his taxable profit to £4,000.  Mr Short therefore has a tax bill of: (£10,000 - £6,000) x 40% = £1,600.

So, if you compare the two tax bills, there is quite a saving there for short-term let, for higher rate taxpayers at least. We 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. It is worth pointing out that some mortgage lenders see renting a property as a breach of their terms and conditions. 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. Therefore proceed with caution, and check your terms and conditions!

Selling the property

When the time comes to sell your property, 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, if you meet the conditions, you may qualify for ‘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.  Please note however, that to benefit from this relief the disposal cannot be the sale of just one business asset, but instead, it must constitute the whole or part of a business. In addition, there could be restrictions if there is “other” use of a Furnished Holiday Let. This is a complex area and advice is strongly recommended here.

Secondly, you may qualify for ‘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.  Please note, however, should that property fail to qualify as a Furnished Holiday Let in a period, then the rolled over gain would be restricted. 

As mentioned earlier, the Furnished Holiday Let conditions require that the property is short-let for at least 105 days per year, 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, don’t buy in London.

Summary

Whilst it can be a bit of a lottery ensuring your property can be classed as a Furnished Holiday Let, there are lots of benefits if your property does qualify.  As you have seen there are many good tax arguments in favour of short term letting, and hopefully you’ve gained some insight about the major differences. Whether AirBnB 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.  It is always highly recommended to seek tax advice from property tax advisors, such as ourselves, especially when getting into more advanced areas of the Furnished Holiday Let rules, such as IHT, stamp duty and VAT, the latter given Furnished Holiday Let income is standard rated for VAT purposes. 

Hopefully this is food for thought, and with the negative tax effects of Section 24, we expect interest in Furnished Holiday Lets to grow and grow.