VAT Implications of Buy-to-Let vs Airbnb

Published 24th January 2024

This article discusses the VAT implications of switching from buy-to-let to Airbnb, including the differences in taxation for rental income, the benefits of setting up a separate legal entity, and the treatment of Airbnb service fees. Seek professional guidance from experts like Hammond-Barr for personalised advice.

Understanding the VAT Implications When Transitioning from Buy-to-Let to Airbnb

The VAT Landscape

Understanding the VAT implications is crucial for sound financial planning in property rentals. Buy-to-let typically involve longer-term rentals; the income generated from these is exempt from VAT. Landlords must pay tax on the profits they make from renting the property. Still, they cannot deduct mortgage interest payments from their tax liabilities.

On the other hand, Airbnb rentals cater to short-term guests, making the VAT landscape significantly different. The income from short-term rentals through Airbnb is subject to a 20% VAT.

Despite this, Airbnb hosts have some financial advantages. For example, if the income exceeds £1,000, they can claim the trading allowance or expenses to reduce their tax bill.

Moreover, unlike traditional landlords, Airbnb hosts can also qualify for the Rent-a-room scheme, offering extra tax-free income.

Switching from Buy-to-Let to Airbnb

Switching from a buy-to-let model to an Airbnb model comes with tax advantages and potential complications. One of the significant benefits for Airbnb landlords is their eligibility for the Rent-a-room scheme tax reliefs on mortgage interest payments.

Airbnb buy-to-let properties may also qualify as Furnished Holiday Lettings (FHL). FHL properties can offer capital gains tax reliefs to landlords, including Investors Relief, Rollover Relief, and Gift Relief, making the switch to Airbnb even more attractive.

Setting up a Legal Entity for Short-term Lettings

Suppose you're considering making the switch to Airbnb. In that case, setting up a separate legal entity for your short-term lettings may be beneficial to avoid potential VAT issues.

For instance, you could form a new company to carry out these short-term lettings, helping to keep your VAT obligations separate and easier to manage. Maintaining separate accounting records and contracts for different entities is also recommended to avoid challenges from HMRC.

Professional services like tax advice from Hammond-Barr can provide invaluable assistance in navigating these complex tax planning issues and ensuring you're compliant with all relevant regulations.

VAT Treatment of Airbnb Service Fees

Airbnb is required to apply VAT to its service fees in countries that tax electronically supplied services. However, guests and hosts may be exempt from VAT on service fees if they are registered for VAT or if their stay is for business purposes.

However, depending on local laws, they may need to self-assess and report VAT. This underscores the importance of understanding your country's specific VAT rules and regulations and staying updated with any changes.

Want to know more?

The decision to switch from buy-to-let to Airbnb should not be taken lightly, especially considering the VAT implications.

Although Airbnb can offer tax advantages, the VAT rules and regulations are complex and require thoughtful navigation.

Professional guidance is often essential in understanding these complexities. Hammond-Barr's team of Stevenage Based Tax Accountants and advisers can provide personalised advice and comprehensive accountancy services to ensure you make the most tax-efficient decisions.

You can contact Hammond Barr accountants on 01438 281281 or via email at [email protected].

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