Getting It Out – Rental Homeworking Payment

Rental homeworking payment

Income Type

Property Income

Company Impact

  • Tax deductible against corporation tax unless excessive
  • No P11D reporting requirements

Individual Impact

  • Any profit over expenses is taxable
  • No national insurance
  • Need to fill in Land and Property pages of tax return

How much?

It depends how often you use the home office as to how much the rent can be, but you don’t want any rental profits to be taxed at the basic rate.

How it works

Back in the old days you use to claim ‘Use of Home’ on your tax return and that was that. However HMRC doesn’t like that any more so a more structured approach is required.

A company needs somewhere to live, and it can rent a home just like any other person. If you take on your company as a lodger in your own home then it can pay you rent.

There are a couple of rules to follow:

  • You only want to give the company a non-exclusive licence to use your home (not occupy it!). This avoids triggering business taxation issues on the property.
  • You are best documenting the agreement as a legal document.

There are also a couple of ways you can use the process:

  • The first is to make the rent variable – based on the expenses of providing the office facility. That way there is no tax to pay.
  • The second is to work out what a reasonable commercial licence fee would be and charge that.

The Fee should be a normal commercial charge for the facilities you make available to the company. It may be worth casting around the local area and see what other people charge to house a company and provide the facilities your home office provides. Whatever they charge, you can. (My local incubator charges £248 per month ex rates for their smallest room).
The Fee paid by the company is property income, and you can charge expenses against that income to determine your profit. A fair proportion of mortgage interest, light and heat and property maintenance costs should be allowable.

Any profit should do no more than use up the 10% starting tax band. Beyond that dividends are a better option. The level of the Fee should reflect that. Don’t forget though that your house may be in joint names, and that both owners will get a share of the profits.

I’ve drafted up a very simple licence agreement template which you can use as basis for your own.

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