As a director working from home, did you know that renting part of your home to your company could potentially lead to Capital Gains Tax (CGT) implications when you decide to sell your home? Understanding these implications and the steps you can take to manage them effectively is crucial for maintaining financial efficiency and compliance.
Understanding the Basics: Rental and CGT
When you rent part of your home to your company, you're essentially stepping into the role of a landlord, managing a commercial property letting business. This scenario brings both opportunities and responsibilities:
Claiming Expenses: You can claim a proportion of your relevant overheads and variable costs.
Tax Returns: You must complete the land and property section of your tax return to declare any rental profit.
Steps to Formalize the Arrangement
For directors with a homeworking requirement, or those whose company is based at their home, formalizing a licence agreement is a critical step. Here's how:
Licence Agreement: Establish a licence agreement allowing your company to occupy part of your property. The company pays you rent and service charges, and you can then claim all your expenses under Self Assessment.
Arm’s Length Basis: Ensure the agreement is set up on an arm’s length basis. This means the terms should be similar to what would be agreed upon between unrelated parties.
Rental Charges: The director becomes the company’s landlord and charges an agreed rent. This arrangement allows the director to offset a proportion of mortgage interest, council tax, and other running costs against the rental income, positioning the director similarly to a sole trader.
Key Considerations and Best Practices
To ensure your rental arrangement is compliant and beneficial, consider the following best practices:
Evidence of Agreement: A director cannot charge rent unless it is evidenced by some sort of formal agreement.
Non-Exclusive Licence: The conventional arrangement is a non-exclusive licence for the company to occupy part of the property during working hours.
Documentation: Ensure any agreement is documented properly. Backdating agreements may be considered fraud by HMRC. Record the agreement in board minutes, even if you are a one-person company.
Commercial Rent: Rent should not exceed a normal commercial rent payable to a third party to avoid HMRC challenges. It’s also wise to check the market rent for local serviced offices for comparison.
Service Charges: Rent may include a charge for the use of services, but the company should contract for its own phone lines and ISP to reclaim the full cost and VAT.
Benefit In Kind: If the company provides broadband at home, it should not result in a Benefit In Kind charge provided that private use is incidental.
Joint Ownership: If the house is jointly owned, a licence agreement must be prepared in joint names.
Declare Income: Rental income, less related expenses, must be declared on the owner’s tax return. Ensure expenses are apportioned reasonably.
Expenses You Can Claim Against Rental Income
Directors can claim various expenses against rental income, including:
Light and heat
Telephone (apportion line rental and calls on non-dedicated phone)
Insurance
Repairs
Capital allowances on business equipment and office shelving
ISP costs, if there's private use
Cleaning
Council tax
Water rates
Repairs or re-decoration of a home office
Avoiding Tax Enquiries
To avoid unnecessary tax enquiries, ensure that your claims are reasonable and not excessive, and that expenses are apportioned on a reasonable basis.
Important Note on Rent-a-Room Relief
Rent-a-room relief for Income Tax does not apply to rooms let for business purposes. When a non-exclusive use agreement is made, it does not affect your CGT Principal Private Residence (PPR) Relief. However, exclusive use will proportionately restrict this relief.
Conclusion
Renting part of your home to your company can be a viable option for directors working from home, but it’s essential to navigate the process carefully to avoid CGT implications. By formalizing agreements, documenting arrangements, and ensuring compliance with tax regulations, directors can optimize their home-based work setups and maintain financial efficiency.
For personalized advice on managing your home office arrangements and understanding tax implications, contact us today.
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