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Rent a room to your company
If you operate a limited company from premises, yet do some work at home, why not rent a room to your business? Then you can offset the rental against your business profits and reduce your overall tax bill.
How does it work?
Well there are just a couple of things you need to do to put this in place. You need to put a rental agreement in place between you (the home owner) and your limited company. Your accountant should have a standard agreement available for you to use, so this need not be an onerous task.
Calculate the rent
The rent that you charge to your business should be equal to the amount that the room in the house costs you.
That means that the income received is equal to the costs and there is no personal profit on the rent. So you do not have to pay any income tax on the rent received, although the income and costs will need to be shown on your self-assessment tax return – just a couple more boxes to complete.
Practical example
Sam runs her business from home. She works in one of the bedrooms. The bedroom is used exclusively for business during the week, but serves as a guest room at the weekends.
Her house has a total of six rooms. Sam has added up her mortgage interest, council tax, utilities, insurance and broadband costs and they amount to £12,000 for the year.
She calculates the rental charge as follows:
Cost per room = £12,000 divided by six rooms = £2,000.
She uses the office five out of seven days, so charges five-sevenths of the room cost to her company. The rental charge is £1,428 for the year. Sam is paid this rental from the business.
The business records this as a cost in the company accounts, which reduces its tax bill. Sam enters the figures onto her self-assessment tax return but has no further tax to pay on the amount received from the company.
What next?
The rent you charge to your company will be based upon your own circumstances. For example, if you rent your property you can use the rent paid instead of the mortgage interest in the calculation, so you will need to do your own specific calculation.
Have a chat to your accountant about how to get this in place. They should be able to help you with the figures and the rental agreement to ensure that you are claiming this tax deduction for your business.
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Comments
Elaine, would this not potentially cause a problem with Principal Private Residence Relief in that part of your home is used for commercial business and could therefore be taxed on any profit made on the sale of the property?
Elaine answers:
There is a common misconception that you would need to pay CGT on the sale of your house if you rented a room to your company. This is incorrect as long as you do not use the room solely for business eg also use it as a bedroom.
Business rates are a separate issue. If you work at home then it may be that you will be charged business rates anyway. Check with your local authority but bear in mind that this could apply even if you do not charge rent to your company.
The company does not have to show proof that the rent is a comparable market rate.
Would this mean that part of the property would be liable to business rates and, if so, is it likely that the amount due woud exceed the council tax otherwise payable? Also, is it necessary to demonstrate that the amount charged is equal to or less than what the company would have to pay to rent similar facilities on the open market?
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