With more and more people working from home, we look at the rules around what Directors of owner managed businesses can claim for in relation to home working costs.
Company builds an office at your home
Where a company pays for an office (i.e. an extension) at a Director’s home this asset should be recognised on the company balance sheet. If the company has exclusive use of the office (i.e. through a lease agreement) or simply a right to occupy the premises (a licence) there should be no benefit in kind implications provided that any private use is incidental.
For capital gains tax purposes where a room/building has been used solely for business purposes you would not benefit from principal private residence relief on this proportion. Therefore, when the residence is sold this proportion will be liable to CGT, having been used exclusively for business purposes, and the base cost will be limited to your original cost (you can’t include any costs paid for directly by the company).
The alternative is to argue that the room/building is not used solely for business use (i.e. private use at weekends). This would negate the capital gains tax charge on future sale but would bring you back within the scope of a potential benefit in kind charge.
The company is unlikely to be able to claim any relief on the structural build cost (potential relief on integral features such as lighting, electrics, air conditioning etc only). However, tax relief can be obtained through capital allowances on any furniture or equipment installed such as desks, chairs and shelving units that the company pays for. Running costs for the office (i.e. electricity, gas and water) can be claimed as business expenses.
The company should also be able to reclaim input VAT on the build as it will occupy as tenant for the purpose of its trade. Further advice should be taken to consider specific VAT implications.
Company rents an existing office/room from you
Alternatively, you may decide to charge the company rent for the use of an existing room in your property. You would need to draw up a rental agreement between you and the limited company and include this rent as rental income on your own tax return.
Rent a room relief does not apply to such payments and therefore to avoid a tax charge the level of rent would need to be calculated to reflect business usage of the property. As you are receiving rental income this would include the relevant proportion of the rent or mortgage interest paid. The proportion can be calculated by reference to the number of rooms (or square footage) and the amount of time used for business purposes (i.e. exclude weekends).
If the rent paid should exceed allowable costs this would give rise to an income tax charge. There would however be corporation tax relief for the company, and therefore this may overall be a legitimate and more effective method of profit extraction than dividend income (we recommend you discuss this with your
usual contact at Moore for clarification).
For capital gains tax purposes, it is beneficial that the room not be used solely for business purposes to protect your entitlement to full principal private residence relief for capital gains tax purposes.
Finally, if you work at home you should check with your local council in respect of business rates. In many cases the council do not apply bushiness rates if it is just a ‘home office’ situation.
For further advice on this or any other tax matters, please contact your
local Moore office.