A return to how life was at the start of 2020 seems some way off. Even when restrictions are eventually eased, the coronavirus pandemic will continue to affect our lives in many ways.
We have now become highly tech-dependent, and no doubt it’s here for the long haul. Digital platforms have become the only way for many of us to continue to work. We are now in an era where bedrooms and kitchen are converted to makeshift offices – working from home is a “new norm”.
How Covid affects our tax position when we sell our home is something we should all be wary of. The taxman is lurking, ready to tax that spare bedroom which has now become the office.
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 when any part of the property is used exclusively for business use.
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 bedroom can 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 income tax implications.
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.
In short, while it is good news to avoid having a room used exclusively for business from a capital gains tax 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.
This article was written by Michael Morter, a Senior Tax Manager and Zahra Bharmal, a Manager in the Tax team at Price Bailey and specialist property consultants. For support in minimising your tax liability and advice on business use and other complex areas, including completing CGT returns within the 30 days from the date of disposal then contact Michael and Zahra via the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.