27 July 2012
Working from home – what are the capital gains tax implications?
Working from home is becoming increasingly popular and it is possible to offset some of the costs to reduce income tax, but what about the capital gains tax implications?
You may have heard people say that it is better not to claim any home-working costs for income tax purposes as it can lead to losing part of the CGT exemption which usually applies when you sell your home (known as Principal Private Residence relief).
This isn’t true as the CGT legislation states that if you use part of your home exclusively for business use then you lose the CGT exemption on that proportion. This would apply whether or not you have claimed any use of home costs against income tax.
However, it is fair to say that if you had been claiming a proportion of your home bills (electricity, gas, water rates, council tax, home insurance, mortgage interest etc) as a cost to help mitigate income tax where a part of your home is used exclusively for business, then it would be hard to argue against a similar proportionate reduction in the CGT exemption when you come to sell it.
But what happens if there is no part of your home that is used exclusively for business? The rules relating the Principal Private Residence CGT exemption specifically refer to any part of the home used exclusively for business, so if you have any office which you use for business but your children also use to do their homework, or you use it yourself to also sort out personal bills and send personal emails then there would not be any exclusive use, which gets around the problem.
It is also worth noting that even if there is exclusive business use of one part of the property, it is only a proportion of the gain from selling your home that would become chargeable to Capital Gains Tax, and with a CGT annual exemption of £10,600 per person you may well have no Capital Gains Tax to pay anyway, especially if the property is jointly owned (e.g. by a married couple) as there would then be two annual exemptions to offset.
To give an example, if you bought your house for £100,000 and then sell it for £300,000 you are making a capital gain of £200,000. This would usually be exempt from CGT but if you had used 10% of the property exclusively for business use throughout your period of ownership then 10% of the gain (£20,000) could become subject to CGT. However, if the property is jointly owned by a married couple then you have two lots of annual exemptions (£10,600 each per annum) to offset and therefore no Capital Gains Tax would be payable.
It is therefore possible to claim home-working costs against income tax without running the risk of paying Capital Gains Tax when you come to sell.
- The CGT exemption for selling your home is restricted where part is used exclusively for business
- This applies whether or not you have claimed home-working costs for income tax purposes
- Exclusive use can be avoided by ensuring some personal use of that part of the property too
- Even if exclusive business use arises there’s rarely any CGT to pay due to CGT annual exemptions