The following article is an excerpt taken from the book 101 Business Tax Tips. Save 40% Today.
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Many small businesses are run from home and a proportion of the costs associated with running and maintaining a home can be deducted in computing the profits of the business.
The fixed costs associated with a home are incurred regardless of whether there is any business use of the property. These include rent, mortgage interest, insurance, council tax and general repairs.
Where a part of the house is set aside specifically for business use, a proportion of the fixed costs can be deducted in computing business profits. The apportionment should be made on a just and reasonable basis, such as by reference to floor area or the number of rooms.
However, where part of the home is used exclusively for business use, that part will not benefit from the capital gains tax main residence exemption when the property is sold and any gain apportioned to the business part will be taxable. In the past, this was rarely a problem as any taxable gain on the business part was usually covered by the capital gains tax annual exempt amount.
However, as the capital gains tax annual exempt amount for 2025/26 is only £3,000, it may be prudent not to use an area exclusively for business to avoid triggering an unwanted chargeable gain when the home is sold. For example, a room used as an office during the day could be used for homework by the trader’s children in the evening.
Evie runs a small business from home. She uses one room exclusively for the purposes of her business. Her home has ten rooms.
For the year in question, she pays home insurance of £300, rent of £12,000 and council tax of £1,500; a total of £13,800. She claims a deduction of 10%, i.e., £1,380, in computing her business profits.
The room is used for the purposes of the business for 60% of the time and for personal use for the remaining 40%, so Evie can claim a deduction of £828 (60% of £1,380) when calculating her taxable business profits.
Home Office: Deduction For Running Costs
The costs associated with a home comprise fixed costs (see Tip 39) and running costs. Running costs vary with use.
Where a business is run from home, a deduction is available for the additional running costs incurred as a result. This will include the cost of using additional electricity, water and gas, additional cleaning costs, etc.
If it is not possible to identify the additional amount incurred as a result of use of the home for business purposes, the total bill will need to be apportioned between business and private use. The basis of apportionment should be reasonable. An apportionment based on hours worked or number of people using the property for business and private use may give a more accurate result than using floor area or the number of rooms.
Phil runs a business from the family home. The annual electricity bill is £2,000 and Phil determines that, based on the hours worked, his business use accounts for 60% of the bill. He claims a deduction of £1,200.
