CGT: How working at home triggers CGT

If you sell your home for a financial gain then as long as you are in the position to claim Private Residence Relief (PRR), demonstrating that the property is in fact your “principal private residence” the gain will be exempt from Capital Gains tax (CGT). What happens though when part of your home is used for commercial purposes, say a home office or a storage space? HMRC could allocate tax on an apportionment of the property profit relating to business use, however, by following a few simple rules, this can be avoided.

PRR and CGT

PRR can be claimed against capital gains tax when a property is sold for a financial gain, yet the property is in fact your primary place of residence, i.e. your home. The rules and regulations set by HMRC dictate that technically, should you use part of your residential property for commercial purposes then PRR should be available to the residential element of the sale proceeds only.

Tip 1 – also use your business room for personal use

Despite legislation, from a practical angle, HMRC, when testing for the need to apportion PRR suggest they would not seek to restrict this valuable tax relief if “a room has some measure of regular residential use”. In other words, should your, say, home office be used jointly for business and personal uses full PRR can still be gained.    Leaving personal items in the business space is often not enough to classify as “personal use” so it is more effective to ensure that any business space is actually used some of the time for personal activities.

Letting your residential room to your company

For tax efficiency, many commercial business owners will set up a formal rental agreement between themselves and their limited company as a way to extract physical funds from their company in exchange for allowing use of the home office or storage facilities, for example. This needs to be done on commercial terms however, there is a concern that by making this process more formal, it implies that the residential room space is in fact exclusively for business use. The letting of a home, or part of it, has also been classified as a business activity since the rules changed in 1996. Regardless though, providing there is some personal use of a business space in a residential property, the rule regarding exclusivity will be overidden and full PRR should be able to be claimed.

Tip 2 – Limit your business contract hours

There is a further measure that can be taken to ensure that your set-up is not going to cause you a problem should you sell your home and make a profit. Limit the hours or days that the business is able to use or access the room or space within the residential home. This demonstrates that the rest of the time it is available for domestic use.

Key points in summary:

  • Any room in your home that you use for business, needs also to be shared for domestic use some of the time
  • Make a formal contract between you and your business but ensure it doesn’t allow access 24 hours a day 7 days a week
  • How many hours a week your decide to contract can be practical around actual use – just make it reasonable
  • Keep personal items in the room also, but don’t rely on this solely – make sure you are using it practically as a personal space as well as for business.
  Many commercial business owners choose to use their home space for work or storage. Figurit can help ensure you are setting up accurate contract terms to ensure tax is minimised. T: 020 7376 9333 E: info@lansdellrose.co.uk

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