CGT: How working at home triggers CGT
Capital Gains Tax (CGT) is applicable on financial profits made on a property sale, however Private Residents Relief (PRR) reduces this if your home is 100% for personal use. Many doctors and dentists use part of their home for business purposes; to write up patient notes in the evening, to make work-related calls, prepare financial accounts and other such related business activities. This can sometimes trigger CGT, although by structuring the arrangement in certain ways, this can be avoided.
Capital Gains and PRR
Technically the law states that if you use part of your residential home exclusively for business use then PRR
, the tax relief available to reduce CGT, has to be apportioned according to the personal element only.
This can leave a proportion, the business element, subject to CGT…something that all business owners are of course keen to avoid.
How can this be avoided?
Regular residential use of a business room
Although the law around this area throws a few grey areas, HMRC suggest that whilst testing if PRR needs to be apportioned they would not “seek any restriction for a room that has some measure of regular residential use”.
This means that if a room, say a home office, which is regularly used for business activities, is also used for some personal use, then PRR won’t be restricted.
Some advice suggests that leaving personal items in the business room is enough to suffice, however, HMRC don’t class this as enough evidence. It is much safer to find a dual purpose for the room to provide reason to retain the full PRR allocation.
Letting your room to your company
Many doctors and dentists opt to let a room in their home to their company for business purposes, receiving an actual rent transfer personally for the use of the facilities.
There is a concern that this set-up implies that the room is exclusively for business purposes. Also, since 1996, the letting of a home, or part of it, counts as a business.
Fortunately for those doctors and dentists in this situation, it is possible to continue renting your room to your company and providing there is the “regular residential use” of the room, the exclusivity rule will be overridden.
To make your set-up watertight though and to avoid any confusion by HMRC should you be subject to an investigation, there is a further action you can take.
When letting your room to your company, there should be a formal rental agreement. By limiting this rental agreement to specific hours in the day and days of the week, shows that for the rest of the time, the room is open and available for domestic use.
The rules around the number of hours and days set out in a contract is not set in stone – you just need to make a judgment call on what seems reasonable.
Key points to take away
Using a room in your home is frequent for doctors and dentists and it pays to get the set-up right. CGT can be a complex area of tax so contact the team at Figurit for more information to ensure you will be in the best tax position for you.
- Make any room in your house used for business, also available for personal use
- “Personal use” in this context doesn’t just mean keeping personal items in the room – there needs to be some actual personal use
- If you let a room in your home to your company, for tax efficiency, then ensure the contract doesn’t cover 24 hours a day, 7 days a week.
- Apportion any letting contract to just suit the hours it is used for business, leaving it free and available for personal use the rest of the time.
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