Home Offices: Tax Traps
Coronavirus has forced many individuals to convert rooms in their homes into workplaces to create a distinction between professional and personal life which can otherwise get blurred quite easily. Even once restrictions were lifted and white-collar employees were encouraged to return to offices, Britons preferred their new normal compared to their European counterparts. A report by Morgan Stanley in early August showed that only a third of office employees in the UK had returned to their desks compared with 83% and 76% in France and Italy respectively.
Time saved commuting and a lower risk of being exposed to the Coronavirus-particularly to those who rely on public transport- primarily influenced this change in lifestyle. Being able to spend more time with family as well as eliminating spending on cafeterias and restaurants have also contributed to the reluctance to return back to the office. Moreover, some have transformed their homes into workspaces with a room dedicated solely for meetings, research and work in general. This can throw up some unintended consequences in the future for those seeking to sell their property who may be unaware of the tax implications of converting a room into a work space.
Individuals who eventually sell their primary property(i.e. it is their only property) are entitled to a Private Residence Relief(PRR) which exempts residents from paying Capital Gains Tax(CGT) on any profit earned on the disposal of their property up to a certain amount.
Re-purposing a room into your workspace can have potential tax ramifications which can hurt your future inflows on property disposal.
Nevertheless, one of the conditions of PRR is that no part of the house must be used exclusively for business purposes. If such isn’t the case, the floor area of the home office will be subtracted from that of the house when calculating the CGT liability. As a result of this, individuals might be liable to pay CGT on the profit on disposal of the home office which will be calculated by measuring the profit commensurate to the floor area of the work room.
For example, if person X purchased their solitary house for £100,000 in 2015 and sold it in 2021 for £185,000, they would have made a capital gain of £85,000. If X decided to convert a room into a home office which, say, accounts for 30% of the overall floor space, they would be entitled to PRR on £59,500[70%*85,000] on which no capital gains tax is payable. However, the remaining £25,500 of profit would be taxable under CGT which would result in the individual incurring an unnecessary tax liability of £2340.
Yet, there are certain ways that people can avoid falling into this trap by leaving the room open to be used for alternative purposes. This ensures the particular room isn’t advertised as an office but rather as a reading or study space.
Seek to better understand how to be tax-efficient with your daily habits? Wish to optimise the tax bill for your entity because your current accountants aren’t giving you the service you deserve? Then Cheylesmore Accountants are here to serve your interests and act as partner in your day to day business activity. We are always available to answer any queries you may have and provide tax advice to ensure your business adopts the best practices to minimise expenses which enhances cash flow as well as profitability.
