Rent from a flat over your shop, office or pub is normally property income, taxed separately from your trading profits, with shared building costs split between the two. When you sell the building, the flat is outside rollover relief and business asset disposal relief, so the price and the gain have to be apportioned between the business part and the let part, and any period you lived in the flat may qualify for private residence relief.

Is the rent part of my business profits or separate property income?

In most cases it is separate. HMRC’s Business Income Manual at BIM41001 says that, subject to a few exceptions, rents must be excluded from the profits of a trade or profession, together with the related outgoings, and dealt with under the property income rules. That applies whether the occupier has a tenancy or only a licence. So a sole trader who owns a shop with a flat above will normally have two sources of income: trading profits on the self employment pages and rental profits on the UK property pages. The general rules for how rental income is taxed then apply to the flat.

There is one narrow option. Section 21 of the Income Tax (Trading and Other Income) Act 2005 (section 44 of the Corporation Tax Act 2009 for companies) lets a trader include rent from accommodation that is temporarily surplus to requirements in the trading accounts. BIM41015 sets out the conditions:

  • the rent is for part of a building of which another part is used for the trade;
  • the rental receipts are relatively small;
  • the accommodation has been used for the trade within the last three years (or was acquired within that period);
  • it is let for a term of not more than three years; and
  • the trader intends to use it for the trade again later.

A flat that has always been a home, and was never used as stockroom, office or staff space, fails the test. The same applies if you have no intention of bringing it back into business use. Once you choose this treatment, BIM41015 says it must continue for as long as the conditions are met.

Which costs can I set against the flat’s rent?

Costs that relate only to the flat, such as its own repairs, redecoration between tenants, letting agent fees and safety certificates, go against the rent. Costs that serve the whole building, such as roof repairs, buildings insurance or a shared alarm, need splitting on a reasonable basis between the trade and the letting. Each part can only be claimed once, and the GOV.UK guidance on working out rental income requires expenses to be wholly and exclusively for the letting.

Borrowing needs particular care. GOV.UK explains that where a loan funds both residential and commercial property, or is partly for a self employed trade and partly for residential property, you must make a reasonable apportionment of the interest. Only the share for the residential flat is restricted to a basic rate tax reduction under the rules described in our guide to landlord mortgage interest relief; the trade share is deducted in the business accounts in the usual way.

Capital allowances

Section 35 of the Capital Allowances Act 2001 stops plant and machinery for use in a dwelling house qualifying for allowances in a property business, so the flat’s kitchen and furniture get no capital allowances. The structures and buildings allowance is also unavailable for the flat: CA92500 explains that a building in residential use, including use as a dwelling house, is excluded. Where one building is used for several activities, CA91900 requires the qualifying expenditure to be apportioned on a just and reasonable basis, so allowances on the shop part can continue. The wider rules are in our guide to capital allowances.

Does the shop’s VAT position affect the flat?

If you have opted to tax the commercial premises, the option does not reach the flat. VAT Notice 742A, paragraph 3.2, says the option to tax has no effect on buildings or parts of buildings designed or adapted and intended for use as dwellings. Rent from the flat stays exempt from VAT, and on a sale of the whole building the residential element is treated differently from the commercial element. Our page on the option to tax covers the commercial side.

How is the gain worked out when I sell the building?

For capital gains tax the building is normally one asset, so you start with a single gain: sale price less purchase price and allowable costs. That gain then has to be divided wherever a relief applies to only part of the building. For gains made from 6 April 2026, GOV.UK gives capital gains tax rates of 18% within the basic rate band and 24% above it, and an annual exempt amount of £3,000 for 2026 to 2027.

The flat is residential property. GOV.UK says capital gains tax on UK residential property must be reported and paid within 60 days of completion, so check whether a return is needed for the flat’s share of the gain; see our guide to the 60 day property return. The commercial part on its own is reported through Self Assessment.

Can I claim rollover relief on the business part?

Yes, if you reinvest in new business premises within the time limits, but only for the trade share. CG60292 explains that under section 152(6) of the Taxation of Chargeable Gains Act 1992, where a specific part of a building is used solely for the trade, that part and the non business part are treated as separate assets. The consideration is apportioned on a just and reasonable basis under section 152(11). Where trade use changed over time, section 152(7) adds a time apportionment.

HMRC’s own example in CG60292 is close to the flat above a shop: Charlie uses the ground floor for the trade while the first floor is occupied by a sitting tenant, the trade part being valued at four fifths of the whole. Relief is then weighted by both the space and the period of trade use. A let flat never counts as trade use, so its share of the gain stays chargeable. More detail is in our guide to rollover relief.

What about business asset disposal relief?

Selling the building while you carry on trading usually does not qualify. CG63975 explains that a disposal of the whole or part of a business is more than a disposal of assets used in a business; it requires all of a business or a clearly identifiable part of it. Selling premises and moving the shop elsewhere is normally just the sale of an asset.

If you close the business, CG64045 allows relief on assets sold after cessation where the asset was in use for the business at the date of cessation, you owned the business for at least two years up to that date, and the sale takes place within three years. The let flat was not in use for the business, so only the trade share of the gain can benefit. GOV.UK gives the rate as 18% for qualifying disposals from 6 April 2026. See our guide to business asset disposal relief.

What if I lived in the flat at some point?

Many shopkeepers and publicans live above the business before letting the flat. Private residence relief can cover the flat for the periods it was your only or main residence, and GOV.UK confirms you always get relief for the last nine months of ownership if the home qualified at some point. Our guide to private residence relief explains the period calculations.

Two points from CG64663 are specific to mixed buildings. First, section 224(1) only excludes parts used exclusively for the business, so a room with regular residential use is not restricted. Second, HMRC says that in a mixed property such as a public house with accommodation above, the business part would be expected to be worth more than the residential part, so an apportionment based only on room numbers or floor area could give too much relief. Use values, not square metres, if the tax at stake is significant.

What does this look like in numbers?

Illustration only. Sam, a sole trader, bought a shop with a flat above for £200,000 and sells it for £320,000, a gain of £120,000 after costs. A valuer apportions the building 70% to the shop and 30% to the flat, and the flat has been let throughout.

Part Share of gain Possible relief
Shop, used in the trade throughout £84,000 Rollover relief if the shop share of the proceeds is reinvested in new trade premises
Let flat £36,000 None of the business reliefs; chargeable at the normal capital gains tax rates, subject to the annual exempt amount

If Sam had lived in the flat for part of the ownership, private residence relief would reduce the £36,000 for those periods and the final nine months.

What mistakes come up most often?

  • Putting the flat’s rent through the shop accounts when the section 21 conditions are not met.
  • Claiming the whole building’s insurance and repairs in both the trade and the rental figures, or in neither.
  • Deducting all the mortgage interest in the trading accounts when part of the loan funds the residential flat.
  • Claiming rollover relief or business asset disposal relief on the whole gain, including the let flat.
  • Splitting the gain by floor area when values tell a different story.
  • Missing a 60 day return for the residential part of the sale.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.