Office by day… bedroom by night?

Recent surveys and statistics suggest that a significant number of people work from home on a regular basis.  It is predicted that prior to the COVID-19 pandemic around 1 in 8 people worked from home and by early 2023 the number was more like 1 in 4, albeit many now vary their time between home and the office.

With working from home likely to remain a feature in modern working practices, how COVID affects our tax position when we sell our home is something we should all be aware of.

Capital Gains Tax

Profit arising on the disposal of a residential property may give rise to a Capital Gains Tax (CGT). A valuable tax relief called Private Residence Relief (PRR) automatically applies where the disposal is of a main residence.

“Exclusive Business Use”

The relief is generous but comes with many restrictions and PRR is not available to any part of the property used exclusively for business.

Relief is only denied in respect of that part of the property that is used exclusively for business. Where there is exclusive business use, it is necessary to apportion gains into business and private components before considering PRR relief. PRR relief is then only given on the part of the property that is used as living accommodation.

To protect the exemption, all that is necessary is to ensure that any part of the home that is used for business purposes is also available for private use. So a room could be an office by the day and bedroom by night! HMRC cannot deny the dual use of the room and restrict PRR. So while PRR may not be restricted, which is great news, there are also income tax implications to consider.

Income Tax vs Capital Gains Tax

HMRC provides relief for expenses to the extent that they are incurred wholly, exclusively and necessarily in relation to the business and for employees working from home. The expenses are offset against your income, and relief is given that way.

Where a room is used exclusively for business purposes, a greater income tax deduction is permitted. Where there is non-exclusive use, the permitted deduction is reduced as costs must be apportioned between business and domestic use.

Note that flat rate expenses claimed during the COVID-19 pandemic against employment income would not jeopardise the availability of PRR

In short, while it is good news to avoid having a room used exclusively for business from a CGT perspective, it is not so advantageous from an income tax relief perspective.

The PRR relief restriction has been around for some time, but it is probably applicable now more than ever before. However, the exclusive business use restriction has the potential to impact many of us.

For support in minimising your tax liability and advice on business use and other complex areas, including completing CGT returns within the 60 days from the date of disposal then contact us via the form below.