Private Residence Relief

Working from home is growing in popularity.  However, have you considered if it could affect your Capital Gains Tax (CGT) private residence relief when you come to sell?

One of the best known tax reliefs, private residence relief allows a person to sell their main home without triggering a liability to CGT.  When someone owns more than one residential property, you can choose which one is the main residence for the purposes of the relief.  It does not have to be the one in which you spend most time in and you change which property is regarded as your main residence, although only one can be the main residence at any one time.

Relief from CGT is given on the disposal of all or part of a qualifying property.

Private residence relief is not available in respect of any part of the property that is used exclusively for business use.  Relief is denied for that part of the property that is used exclusively for business use.  Therefore, where there is exclusive business use, any gain on the sale of the property must be allocated and the proportion on the area relating to exclusive business is subject to tax.

For example, if I run a graphic design business from home.  My house has seven rooms and I use one exclusively as an office.  On the sale of my property, I receive a gain of £40,000.  One seventh (£5714) of that will be subject to CGT.  As my annual exemption (£10,100 for 2010/11) remains available, the gain will be sheltered and the result is that no CGT is payable.

The same applies for people who are employed workers but work from home and set aside a dedicated area exclusively for work.

Relief is only lost where there is exclusive business use of part of the property.  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.  For example, a room used as an office during the day could also be used by the taxpayer’s children to do their homework in the evening.

By making rooms used for business purposes also available for domestic use, it is possible to work from home and ensure that private residence relief remains available for the whole property.

Non-exclusive business is a ‘good thing’ for protecting the full entitlement to private residence relief; however, the same cannot be said for income tax.  Relief for expenses is available to the when they are incurred wholly and exclusively in relation to that business.  Where a room is used exclusively for business, a greater deduction is permitted.  Where the use is non-exclusive, the permitted deduction is reduced as costs must be allocated between business and domestic use.

In summary

If part of the property is used exclusively for business, all is not lost from a CGT perspective.  Depending on the amount of any gain in relation to the business part, it may be possible to shelter the gain with the annual CGT exemption.  This makes it possible to use part of your house exclusively for business and to sell the house without paying any CGT, while enjoying the maximum possible deduction for expenses in the process.