Basement flat or lodger room: which is more tax efficient?

[Otter1986]

We are looking at a house to buy, with a basement flat and wondered if anyone could offer some insight into whether keeping this as a separate dwelling would be more tax efficient vs bringing it back into the main house and renting out a room.

Those are both options for us and we called around a couple of tax people to ask the question but couldn't really get a straight answer.

Here are the pertinent details:

The flat comes as part of the house - we don't need another mortgage etc... It needs renovating - in our opinion - no matter what, so the options to make it into one is totally there as part of that piece of work.

It would probably rent out at about £1100 p/m plus bills, as a standalone flat. Poss more but we are going to take the garden and parking for ourselves so it we are assuming we'll get a lower price.

It is a very popular area and we do not think we'll have trouble renting it out.

If we made it a room with an ensuite, we could rent to an international student (we have friends who do the same) and get about £750 p/m. So, we'd be a little bit over the £7500 rent a room allowance but not by much.

We are both higher rate tax payers, though I am a freelancer and am a little light this year so who knows in 25-26 tax year.

The work to bring the flat into the house is larger than just renovating what is there. So, I don't want to bother if it's not worth it. But if tax will be so high that rent-a-room is better then we'll do the work.

No idea about the taxes, sorry.
How do you feel about having a student living in your home? Sharing your kitchen, coming home late etc etc. For me that would be a way bigger influence on my decision that the finances. I would hate it, but I know some people really enjoy the interaction.

We are both higher rate tax payers, though I am a freelancer and am a little light this year so who knows in 25-26 tax year

If you have a joint mortgage you have to split the £7,500.00 between you so even if you’re under the higher rate threshold, it will only apply to your half. The other £3,750.00 will be subject to your partners higher rate tax.

You need to share some things eg the laundry room or washer dryer with the lodger to make them count as a lodger but you don’t need to ‘bring it into the house’ surely? . Why would you only offer to an international student and not a young professional or couple that could afford it and pay more?
logers are easier to get rid of. Much easier.
if it’s a flat you could consider openings limited company holiday home business and renting it on air bnb.

The flat is self-contained - I should have said - but we could put in stairs from the house above and make the large kitchen living room a rentable room, with en suite - suitable for a single person only. We would then have access to the rest of the flat as part of our own home. If we didn't do that then it remains it's own space and would be a full 1 bed flat with its own bedroom, kitchen, living room and separate bathrooms.

That changes the tax issue of the flat - either it is a flat by itself or it is a basement in our house - accessible to everyone - and we would just rent out a room to a single person. A student would be a ideal, as we can get a council tax break.

My mum used to rent the spare room with shower and washbasin in it, mostly because she liked it, she didn’t need the money. We had students who only stayed 3-6 months though and they travelled up to Waterloo from SE London so were out in evenings.

I can't edit the original post but I should have said it is a self contained flat. 1 bed, 1 bath, a laundry room and a large kitchen / living room.

It has its own entrance and electric supply and so forth.

If we reinstalled the stairs we would be have internal access to the downstairs thus 'bringing it back into the house'. That would have to be the case to qualify for rent a room; you can't qualify if you don't share certain amenities or access.

Will the flat be rentable? Does it have (can you get) an epc of c or above? If you do rent look into the type of tenancy - it’s not necessarily an AST (I can’t remember the name but it’s tenancy with a resident landlord - easier to get them out).