Home Offices – Is your use exposing you to a Capital Gains Tax liability?
With more and more people currently working from home and being given the option to do so on a permanent basis, the idea of converting your spare room into a dream office to be used solely for work purposes may seem very appealing.
However, you should be aware of the impact that this could have on your Capital Gains Tax (“CGT”) liability when you sell your property. This is because Private Residence Relief (“PRR”) is restricted if a room or area of a property is used exclusively for business purposes, i.e. for a trade, business, profession or vocation (with no private use at all).
In summary, you will not be required to pay CGT if you sell a property which is your only residence and has been your only home throughout your period of ownership – this is due to the availability of PRR. For more details about PRR, what it is and how an election can be made to designate a principal private residence please see our previous articles.
In light of the above, if you use a part of your property for work purposes only then PRR will be restricted to reflect this; for example, if your home office used solely for business equates to ten per cent of the total area of your house, a capital gain of £150,000 on disposal would result in a gain of £15,000 remaining chargeable. Once the Annual Exempt Amount has been considered (£12,300 for 2021/22), the balance would be taxed at either 18% or 28%, depending on your income levels.
Nevertheless, if you ensure that the area that you work in is also used for a non-business purpose then the above should not apply. For example, it could be used as a home gym or a playroom for your children in the evenings and at weekends. In this case, there should be no PRR restriction because the space would not be used exclusively for business. However, HMRC have confirmed that minor private use of a room would be disregarded (such as a doctor keeping private possessions in a room used as a surgery would be regarded as exclusive business use).
This also relates to expenses that you may be claiming in relation to working from home. If you are claiming your actual expenses (as opposed to the flat rate allowance), you should reflect the actual business use in your claim (i.e., if the room is used for 9 hours each day and 7 of those are for business only, then the claim should be restricted accordingly).
Furthermore, some directors may charge their company rent for the use of their home office in order to extract profits efficiently – in this case, a formal rental agreement usually exists and this should include terms that the room will only be used for business for a specific number of hours each week/month.
If you are using an area of your main residence for PRR exclusively for business use (such as your home office, meeting rooms or a workshop), you will need to apportion any chargeable gains that arise on its disposal. Care must be taken when carrying out this apportionment.
Please contact a member of our team if you are disposing of your main residence and you require assistance with the apportionment of chargeable gains. Similarly, we would also be happy to discuss any general queries that you have in relation to business use of your home.