Working from home is increasingly popular, but could it affect your Capital Gains Tax (CGT) private residence relief when you come to sell?
Private residence relief is perhaps one of the best well-known tax reliefs . It allows you to sell your main home without triggering a liability to CGT. As with most reliefs, its availability depends on certain conditions being met.
The relief applies to the disposal of a main residence. Where a person has more than one residence, he or she can choose which one is the main residence for the purposes of the relief. This does not have to be the one in which most time is spent and a person can chop and change which property is regarded as his or her main residence, although only one property can be the `main’ residence at any one time.
Relief is provided from CGT on the disposal of all or part of a property that is, or has at any time in taxpayer’s ownership, been his or her only or main residence, together with land enjoyed with the property as a garden up to the permitted area.
No Relief for Exclusive Business Use
Private residence relief is not available for any part of the property that is used exclusively for business use. The key word here is exclusively and relief is only denied in respect of that part of the property that is used exclusively for business use. Where there is exclusive business use, any gain arising on the sale of the property must be apportioned and the proportion relating to exclusive business is taxed.
Example Sue runs a business from home which has eight rooms one of which she uses exclusively as an office. When she sells the property, she makesrealises a gain of £80,000. One eighth (£10,000) would be charged to CGT. To the extent that her annual exemption (£10,100 for 2010/11) is available, this would shelter the gain with the result that no CGT is payable.
The same considerations apply if a person is employed but works from home and sets aside a dedicated area exclusively for work.
Protecting the Exemption Relief is only lost where there is exclusive business use of part of the property. To protect the exemption, all you need do is 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 from which to run the business during the day could also be used by the children to do their homework in the evening.
By ensuring that rooms used for business are also available for domestic use, it is possible both to work from home while ensuring that private residence relief remains available for the whole property.
Income Tax Dilemma While non-exclusive business use is a `good thing’ in protecting full entitlement to private residence relief, the same is not true from an income tax angle. Relief for expenses is available only to the extent that 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 there is non-exclusive use, the permitted deduction is reduced as costs must be apportioned between business and domestic use.
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