Easy to read, accessible tips and strategies for small business owners
We are often quizzed by clients who are contemplating working from home: what are the tax consequences? And in particular, will I have to pay capital gains tax?
Capital gains tax
Generally speaking, if your business use is limited to allocating space for a home office, then as long as there is duality of use, no capital gains tax complications should arise when you sell the property. Duality of use means that your home office: doubles as a spare bedroom, or a storage space for domestic items, or is a study or has a similar non-business as well as a business use.
If the property you work in has a more permanent business area, for example if you live in a flat above shop premises, then sale proceeds will need to be apportioned and you will need to consider the capital gains tax position of any profit on sale attributed to the business premises.
If you use space at home as a self-employed person you can claim reasonable, apportioned costs for the use of the space. How you make the calculation can be quite complex and will need to be based on the actual costs of occupying the relevant space. If you work 25 hours or more from home each month, you can claim using HMRC’s simplified rates:
- 25 to 50 hours a month – £10 per month,
- 51 to 100 hours a month – £18 per month, and
- Over 100 hours a month – £26 per month.
You won’t need to worry about paying business rates for home-based businesses if you:
use a small part of your home for your business, for example if you use a bedroom as an office, or
sell goods by post.
You may need to pay business rates as well as Council Tax if:
- your property is part business and part domestic, for example if you live above your shop,
- you sell goods or services to people who visit your property,
- you employ other people to work at your property,
- you’ve made changes to your home for your business, for example converted a garage to a hairdresser’s salon.
You should contact the Valuation Office Agency to find out if you should be paying business rates. In Scotland, contact your local assessor.
Other complications arise, for example you may be required by your employer to work from home a fixed number of days a week. Any contribution you receive from your employer to cover your costs could be tax free if a nominal amount or a taxable benefit if excessive.
If you are considering working from home, to manage your own business or your employment needs, we can help you quantify any tax implications, and in particular, calculate a realistic “rent” for your home space that will not cause any unexpected tax consequences.