Property

If you have a spare room in your house or even a granny flat out the back, renting it out can be a great way to make some extra income. There’s an increasing demand for affordable housing of this kind, and you can even set up an arrangement with universities who regularly have foreign students looking for cheap accommodation.

Once you’ve decided to go ahead with it and put your available space out there, you’ve still got a few things to think about.

The tax legislation behind ‘arms-length letting’ as it’s known can get very messy, because there are so many different arrangements you can have. How much of the house is the lodger paying to use? Will they pay more to cover the bills? Do you include meals or not?

Because every situation is going to be different so you’ll need to get specific advice from your accountant to see what your tax implications will be.

As a rule of thumb though, letting space in your house or granny flat works just like any other investment property. The income earned is taxable income.

But that also means you’re entitled to claim deductions on costs directly relating to earning taxable income from that investment. In this case, that will include electricity and water bills and maintenance of that part of the house. It’s no different to having a home office or an investment property.

Also think about the implications for when the house is sold. Remember someone’s principal place of residence is capital gains tax free when sold. But if a portion of the house earns income from a lodger or home office (and deductible costs have been claimed against it) then that portion could be subject to capital gains tax on a sale.

The same goes for renting out a room to a relative, as long as it’s the same situation as any commercial agreement. If you charge a relative a lower-than-commercial rate, then your individual case is looked at to determine what sort of taxes apply.