Use of home deduction when using a Ltd
While sole traders and partners can claim an amount for using their own homes for business use, companies cannot as they do not have ‘homes’ so if a Director works from home and wants to make a claim for the cost incurred it is necessary for the Company to rent the proportion of the property that the Director uses. To ensure that the Company can get a corporation tax deduction for the rent it is best practice to have a rental agreement in place between the Director and the Company.
The rent charged should be worked out as being a proportion of the expenses incurred time apportioned to the time that property is available. Expenses that can be claimed include council tax, mortgage interest, heating and lighting costs, water, insurance, broadband connection, maintenance and repair, (this is not an exhaustive list) HMRC business manual BIM47820 deals with allowable expenses and suggested methods of apportionment are dealt with in BIM47815 with some examples at BIM47825.
The rent received will then be taxable in the hands of the Director and will need to be declared on the personal tax return. It is important to remember however that if the property is owned jointly then the rental income should be split between the joint owners using the expenses incurred against the income and if the director is on the low salary and dividend scheme then they will have some unused personal allowance to set against any profit on the rental.
In other words, if the rent charged is based on the proportion of household bills claimed then the director would have no additional income tax to pay. But if the director receives a salary at the Employer's NIC threshold of £7,696 for 2013/14, and their only other income is from company dividends, then a small rental profit may not trigger a tax charge. The income tax personal allowance is £9,440 for 2013/14, and if the salary is only £7,696 then there will still be £1,744 of the personal allowance to use. In that case it will be beneficial for the rent to be £1,744 higher than the breakeven, providing in effect a corporation tax savings of £348.
