An increasing number of our clients are running home-based businesses or are working from home at least some of the time.
One issue that troubles lots of people in this situation is whether claiming home expenses against tax has any impact on capital gains liability when selling the home.
Let’s clear up some misconceptions.
Claiming home expenses against income tax liability is not directly connected to the CGT issue. Most people will be able to claim a proportion of fixed and running costs (by area of the house used and frequency of use) on items such as heat, light, insurance and phones, whatever use they make of their home.
The CGT issue relates to an exemption called Principal Private Residence (PPR) relief, which means that homewners do not normally pay Capital Gains Tax when they sell their main residence. If any part of your home has been used exclusively for business purposes then part of any gain made from a sale might attract CGT.
There are two important points to consider.
The first is that for most people working at home it is unlikely that any part of the house is used exclusively for business. Any personal or domestic use such as; doing home accounts, storing furniture or letting kids do their homework would allow PPR exemption to be maintained.
Secondly CGT would only be liable on the proportion of the gain attributed to the part of the property that was being used exclusively for business. That gain would be offset by your CGT annual exemption of £11,100 (2016/17) and by double that if the property is owned by you and your spouse.
So you can go claiming home expenses to reduce income tax without causing problems when you sell your house. However it’s wise to think carefully about how much you claim because overdoing it could prompt an HMRC inspection. It’s also wise, therefore, to be able to show that no part part of your property is exclusively for business use (a box of strategically placed children’s toys, a set of golf clubs or the ironing board might help).
Lewis Smith & Co. is around to provide advice on both income tax and Capital Gains Tax if you need it. Why not set up a free, confidential discussion today?
Lewis Smith & Co. – Preparing company accounts for Kingswinford businesses for 30 years