Tax Questions: Creating a Home Office

Garden Office

With the new wave of remote working since Covid along with the rising costs of fuel, many business owners are doing away with business premises and are choosing to work from home, allowing their staff to do the same. When it comes to creating an office at home, will the work count as a taxable benefit?

As a director, if the business you own pays for equipment like a computer and office furniture, and then allows you personal use of it, or transfers ownership to you, you’ll be taxed on a benefit in kind. The taxable amount depends on whether you or the business owns the items.

If you use goods paid for by your company for business purposes with a insignificant amount of personal use, there’s no taxable benefit. However, this doesn’t apply to costs of an ‘extension, conversion or alteration of living accommodation‘. You can go tax free with reasonable redecoration of your home office in these cases.

Before starting building work, you can grant your company a lease allowing it exclusive use of the part of your home (for say 10 years) and the creation of the office relates to the lease not the freehold. As a result, the benefit in kind charge is deferred until the lease expires.

There’s also another tax advantage relating to diminished value. The taxable amount of a benefit on goods transferred can be calculated on market value at the time of transfer. The market value is taken when the lease expires. One method of arriving at the market value is to value the whole property with the conversion and then assuming the conversion didn’t exist, the difference would be the taxable amount.

If the conversion cost £25,000, but only increased in value by £10,000, you’ll be taxed on the lower figure. This works if you create a formal lease. A licence to use or a rental agreement doesn’t work in this way as it doesn’t give your company a ‘legal interest’ in the property. As well as reducing benefit in kind on which NI is payable, you can escape the benefit in kind tax this way.

A less obvious NI saving relates to rent your company pays under the terms of the lease – while this is taxable income, it’s not liable to NI. This makes the rent a tax/NI efficient way of extracting money from your company.

In sum…

The creation of a home office paid for by your company can be a taxable benefit. To mitigate this, lease the part of your home used as an office to your company before the work commences. This will defer the tax charge until your lease expires. By then, the value of the conversion will probably have depreciated, which means a lower tax bill.

Let’s Talk

For advice on the above, contact our team of tax specialists on Let’s Talk.

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