Home offices and tax

Whilst workplaces continue to be closed for an extended period, more and more people decided to create a dedicated workspace at home. HMRC is now targeting these spaces – how can you avoid a tax bill?  Tax Expert Brona MacDougall advises.

As offices closed across the country back in March, working from home has became the norm for many people. Even when things began to reopen in the summer, many have opted to keep working from home. However, combining this with the closure of schools for nearly six months has meant a need to segregate work life from home life. One option to achieve this is by converting an unused space, for example a spare bedroom, into a dedicated office. But could this lead to a tax problem in the future?

The issue stems from restrictions to private residence relief (PRR). This generally works so that you don’t pay capital gains tax (CGT) when you sell a property that has been your only (or main) home at a gain. However, if any part of the property is used exclusively for business purposes, HMRC argues that it can’t be a “residence”, and so the relief must be apportioned. The following example illustrates the potential consequences.

EXAMPLE
Tim bought his three bedroom home in 2000 for £250,000. He converted one of the bedrooms (comprising 20% of the property’s floor space) into an office and banned his partner and children from using it. He sells the house for £550,000 in 2025. 80% of the gain, i.e. £240,000, will qualify for PRR. However, the other £60,000 is charged to CGT.

Fortunately, it is easy to avoid this trap. Simply ensure that the room has multiple uses. Turn it into a reading room that your desk and computer just happen to be in, and it can’t be said that it is being used exclusively for business. Advertise it as a “study” or “reading room” when you come to sell it, rather than an “office”.

If the part of your home used for business is one of those fancy sheds in your garden the chance of there being a taxable gain when you sell your home is remote. You should value the “shed” separately from your main home; its sale value is likely to be less than what it cost you to install, therefore you’ll have made a loss not a gain.