Let a converted garage to generate tax-free income
Let a converted garage to generate tax-free income
You've been toying with the idea of converting your garage to additional living space. You might use it personally or let it out in the short term to recoup some of the conversion costs. Can you legitimately avoid paying income tax on the rent?
Rent-a-room relief
The answer to the question posed above is "yes", but subject to conditions. The income is exempt from tax so long as it doesn't exceed the rent-a-room relief (RAR) limit, normally £7,500 per year. The exemption applies where you let furnished residential accommodation in your own home. Trap. Letting part of your home to someone for commercial use, e.g. as an office or storage space won't qualify for RAR.
How it works
If the rent you receive is less than £7,500, the relief (exemption) applies automatically, and you don't need to report anything to HMRC. However, if you're lucky enough to make more than £7,500, you must notify HMRC but you can make an election to the effect that only the income in excess of £7,500 is liable to tax.
The limit applies to the income before taking off any related expenses. RAR can apply not just to rent but any money you receive for goods, e.g. meals and services such as laundering. Tip. Keep a record of your expenses because if they do exceed your income, you can make an election to disapply RAR and claim the loss instead.
More than one tenant
The headline figure of £7,500 applies to you as the landlord, meaning you can rent out as many rooms as you like and qualify for RAR. You'd need to charge £625 per month to make the most of the relief so consider whether there is enough space for two bedrooms, or whether you could charge more for one larger living space with more amenities.
or whether you could charge more for one larger living space with more amenities.
Temporary division trap
If the garage is a separate building to the main home, or you're able to convert an attached garage into self-contained accommodation, a question arises as to whether it is still a part of your home. If it's not you won't be entitled to RAR. However, a self-contained flat can qualify if the division of your home is temporary. HMRC guidance encourages officers to inspect the premises to check. There are several factors to consider including whether structural alterations would be needed to undo the division and whether the flat has a separate address or utilities.
Tip. If you go down this route, take steps to show that any division is temporary and that the flat will still be part of your home once the letting ends. Note that a separate residence could lead to additional Council Tax. Check with your local authority.
Joint owners
If you jointly own your home with another individual the RAR limit is shared between you so that you each get £3,750. However, if there are more than two joint owners the allowance per person is not reduced further. For example, if a property is owned by three individuals, each is entitled to £3,750 RAR, meaning that the total is £11,250.
Tip. The RAR amount applies to each tax year and isn't reduced if you start letting part way through the year.
You can receive up to £7,500 rent tax free by making use of rent-a-room relief. The relief applies as long as the conversion doesn't create a separate dwelling, e.g. accommodation with its own entrance. Subject to these conditions, letting a converted garage as furnished residential accommodation can generate tax-free income.