The permanent home office: Tax trap?

As restrictions ease (for the time being at least) and there is an attempt to restore some normality to working and office life, much attention is being paid by employers and employees alike to the “return to the office”. Will there ever be a full return? There are polarised opinions on both sides of the argument and while it may be some time before there is a definitive outcome, what is certain and is often the case with any change is that there are tax consequences and those need to be identified and thought through.

During the pandemic significant numbers of office workers have either turned a room in their home into a fully-fledged office, or in some cases built office buildings in the garden and grounds of their homes.

Many families have relocated geographically on the basis that working from home more frequently is perfectly feasible and commutes to the office less frequent. A home office makes a great deal of sense: it provides a means of physical detachment from office and home life but at the same time it is just that physical detachment home owners need to take some care with from a tax perspective.

In most circumstances when an individual sells their main home they pay no capital gains tax on the sale regardless of the increase in the value of the home during the period of ownership.

The introduction of a dedicated home office, be that inside the home or in the garden, can inadvertently prejudice that relief, as there is no relief from capital gains tax on any part of a home used exclusively for business purposes, i.e. a home office.

A calculation needs to be performed to assess what value is attributable to the home office is and that is potentially subject to a charge to capital gains tax on sale. Whether the impact is significant or not will depend on the circumstances and while it is something that is often missed, it should not be.

Perhaps more importantly there are a range of other tax and legal issues which home owners ought to bear in mind when thinking of creating a home office:

• VAT and the recoverability of it when constructing office space at home
• What costs are deductible from profits generated?
• Whether there are benefits in kind tax issues for employers and employees to take into account?
• Making sure any insurance in place for the home and its contents are not prejudiced by running a business or working from home
• Is any planning permission required for what is being constructed?
• Are there any implications for the mortgage or finance secured on the property?

We have experience in helping clients identify whether any of these issues are relevant and subsequently how best to navigate them.

Contact our Private Client team 01227 763939 for advice.