I am sitting writing this in my office, which is a room in my home. When I came into the room just now, I tripped over a pair of my wellies, and knocked over a goretex jacket that was drying on the back of a chair. Fortunately, I didn’t knock the photographic equipment off the side table…..bear with me, this all has something to do with tax planning!
Many self employed people like me, or family partnerships, use their home as a base for their business, and set aside a room as an office, or perhaps a garage as a workshop. This article deals with the tax issues to remember in these circumstances. It is NOT about businesses that are run through companies or businesses where a significant part of the building is used for business such as pubs or shops with accommodation upstairs – these will be dealt with in future articles, as will the situation of an employee working at home. This is about using a small part of the family home as an office or a workshop if you are self-employed.
What household expenses can I claim?
If like me you use one room in the house as your office, you can claim a proportion of the following expenses:
- Rent, if the property is rented, or a proportion of the mortgage interest if the mortgage was used to buy the property
- Heat and light
- Repairs to the whole building (such as retiling the roof) or to the business room itself, but not, for example, replastering a non-business room such as (in most cases!) a bedroom.
- House insurance
- Council tax
What proportion can I claim?
There is no specific formula –you simply need to apportion the expenses on a reasonable basis. My house has eight rooms, one of which is my office. I do not work in it every day of the year, of course, but on the other hand my heating and lighting bills are probably higher than they would otherwise be because I am at home most days, with the lights and the computer switched on. I also use my office for other non-business purposes. Taking all this into consideration, I claim 10% of the expenses referred to above, which I think is reasonable.
It may be different for you – for example if your business means you use a lot of electricity for machinery, you might claim a higher proportion of that. If you spend money specifically on the business room – such as on painting it, or repairing a broken window, then claim almost all of the cost – say 90% - but not quite all, for the reason explained below.
Watch out for CGT relief for main residence
If your office is in your home, or your “only or main residence” as the taxman calls it, then make sure that the office or workshop is not used exclusively for your business. If it is, then when you come to sell your house, the part of the capital gain relating to the room used for your business will NOT be exempt from capital gains tax.
If on the other hand, it is used mostly for business but also for some domestic purposes, then the exemption from CGT will not be restricted.
Examples of the sort of domestic use I mean would be occasional use as a spare bedroom, use as a storage area for your books or CDs, or use for a hobby or for storing and maintaining sports equipment –
So you see, that wellie I tripped over, and the goretex jacket and the stuff for my camera, are in my office for tax planning purposes!