What tax relief for use of home?
This is a common question and unfortunately, it's a bit more complex than most people think.
Depending on your legal setup, the steps to take to recover some of your personal expenses on use of home are different. For a sole trader, the process is quite straightforward but for a limited company there is a bit more work and paperwork required:
You are a sole trader
You can just deduct a portion of the home cost. The calculation is done as a two-step process. First you calculate the total running cost of your home:
- Utilities (Water, Gas, Electricity)
- Insurance
- Rent or Mortgage Interest
- Council Tax
- Maintenance
- Internet and Phone
Then you apportion that cost using the following criteria:
- Space: percentage of the house used by the office. Common parts like bathroom or kitchen should not be taken into account, however.
- Time: percentage of the time that this space is used as an office. It is important that during that time the space is used exclusively for the business. Using a kitchen table part of the time or a desk in the bedroom would therefore be challenged by HMRC.
You are incorporated
You need to figure out who gets the relief. As a company employee the HMRC allows you to expense £3/week without receipts, plus phone expenses, when you work at home. It must be specified in your employment contract that you are required to work at home, however. Alternatively, you can charge rent to the Limited company. The company will be able to deduct rent as an expense, but you will have to add the rent revenue (minus any associated costs) on your self-assessment tax return. If you have other buy-to-let properties on which you make a loss, this could turn out to be a good scenario. It is important however to ensure that a contract is in place that specifies usage, and that rent is at market value. You could figure out the market value using a similar methodology to the one above.
In either case however, it is critical no part of the house be used 100% of the time if you own the property as it would have a capital gain tax implication. That space would then be excluded from your principal residence, and you would not be able to benefit from the PPR exemption on resale of the property.
