Tax implications of renting a granny-annex

parkview094

Hello,

We've got a 5 bed home which has a separate and entirely self contained 1 bed granny-annex which we're thinking of renting out to help pay the bills.

I'm wondering what the tax implications of this are.. I'll seek professional advice, but would be interested in folks thoughts on the below:

Since the granny annex is entirely self contained, I understand we have to decalre this to the council for the purposes of council tax and consequently we're not entitled to the rent-a-room relief.

From the "Sell your own home (CGT)" link on the HMRC website, it would seem as though renting out a granny annex also creates a CGT liability should we decide to sell the home.

But from the "Tax on Rental income " link on the HRMC website, it would seem to suggest that the rental should be subject to the same reliefs as any regular buy-to-let.

Since we have a mortgage on the home, can we claim tax relief on a portion of the interest on the mortgage? And if so, how much? Would this use the same ratio as the CGT liability? Speaking of which, how do you calculate the CGT liability? Is this based on bedroom ratio, square foot ratio or council tax ratios? Can we choose?

Cheers!

Mark

parkview094

P.S. - What happens to the CGT liability if we stop renting the annex and incorporate it back into-the house for a period of time?

Pennywise

CGT will be based on the value of the granny annexe compared to the value of the entire house. You'd probably need a valuer to split the original costs and the eventual sales proceeds. It's pro-rata'd on a time basis i.e. period rented out compared with total period of ownership.

Yes, you can claim a proportion of all house costs including mortgage, insurance, power, rates, repairs, etc.

Before all that, though, are you actually allowed to rent it out - most granny annexes have planning permission restrictions that they have to be occupied by members of the household and can't be separately sold/let. You need to check the planning permissions first.