With so many people now working from home and many owner managed businesses having to work from home, we have been asked by many whether their business can pay for their home office.
Having a dedicated space for your work, is a bit of a sanctuary and removes the element of having to move the laptop and paperwork from the dining table every day or even being able to close the door and not checking emails at 10pm.
There are various solutions to having a dedicated workspace and we will consider these together with the tax problems that may occur and how they may be overcome.
1: Convert a spare room into a dedicated office.
Many may not have the luxury of a spare room and may have to use their dining table. However, if you do have that spare room, the main tax problem here is if your room is solely used for business purposes. When you sell your main home, there is usually no capital gains tax to be paid as all rooms in the house are used for domestic purposes and you are entitled to claim PPR (principal private residence) relief. However, if your room is dedicated to business use only, this can make it taxable and liable to capital gains tax (based on the number of other rooms in the house).
In order to avoid this tax charge, you would simply ensure the room has multiple uses. Examples would be that it has a sofa bed in the room for when friends stay over; it is used by the rest of the family for homework; it is a study and not an office. These small changes to a room should prevent you from having to pay capital gains tax relevant to that room on the sale of your property.
2: Having a pod/shed in the garden as an office space.
Many people prefer to move their office space out of the house and would look at having a “pod” or “shed” in the garden used as an office. The unit may be considered as a taxable gain when the house is sold. It is beneficial to ensure that the whole family may have use of this space and hence allow it to be treated as part of the home. This is similar to the example earlier with the spare room.
Any rooms, “pods”, “shed” or other rooms used for business purposes or even as a place you work from home, should always be available to the whole family to use and have alternative uses.
3: How would tax be charged if I have a dedicated office space?
Example: Sam purchased a three-bedroom home in 2001 for £250,000. In 2020, he converted one of the bedrooms into an office and did not allow his children or others to use the room. The room comprised of 20% of the floor space of the property. In 2025, Sam sells the property for £550,000 and makes a gain of £300,000. £240,000 (80%) of the gain will qualify for PPR and so there would be no tax on the gain. £60,000 (20%) of the gain would be charged to CGT (capital gains tax). This could amount to £16,800 in tax. Had Sam allowed the rest of the family to use the room, this tax charge would not need to be paid. Allowing others to sue the room would save saved Sam £16,800 in tax.
4: Can the business pay for the fixtures and fittings of the space?
Items such as desks, cupboards, shelving, chairs etc. can be paid for by the business and these would be treated as a business expense. The business would be able to claim capital allowances for the amounts and therefore save tax.
Insulation of the structure may also be allowable under capital allowances and therefore have a tax saving.
5: If I am an employee, can my employer pay me for working from home?
H M Revenue & Customs have a standard work from home allowance. This rate is used to cover the utility bills for you working from home. The rate is not taxable to you and does not incur a benefit in kind. In other words, the amount is tax free to you. The rate up to 5th April 2020 was £4 per week. From 6th April 2020 the rate increased to £6 per week. If your employer does not pay you this rate, and you work from home, you are able to make a claim to H M Revenue & Customs for the allowance and you may receive a tax refund.
Please always seek professional advice before taking any action. We are happy to answer questions in future issues. Please send your questions to: firstname.lastname@example.org.
Chantal Baker, is the director and founder of Champ Consultants Ltd, an accountancy and tax consultancy practice in Caterham. Please do follow us on the various social media channels.