The national lockdown in March 2020 led to many millions of employees working from home almost overnight. Increasing numbers of people have seen the benefits which working at home brings which has led to a rush to buy property with the potential to build or use an additional room as a 'home office'.
Homeowners should think carefully, however, about the potential tax implications of such arrangements.
Capital gains tax (CGT) is a tax on the profit made when someone sells an asset that has increased in value. It is the gain which is taxed, not the amount of money received. The main asset which many people own is their home. Most people are not concerned about CGT on the sale of their home because of the private residence relief. If the property being sold is the owner's home and they have lived in it as their main home for their entire period of ownership, no CGT is payable, even if any gain made is significant. It is not necessary for the homeowner to do anything because the tax relief is automatic.
However, there are a number of conditions which apply to the relief, one of which is that part of the property sold must not have been used for business purposes. If part of someone's home has been used for business purposes, some CGT may be payable if a gain has been made when it is sold.
An additional point to keep in mind is the change that HMRC introduced regarding reporting and paying CGT. If the property was sold after 6 April 2020, the homeowner must report and pay CGT within 30 days of selling the property. Interest and penalties may be payable if the gains are not reported within this time limit.
Accordingly, homeowners must be aware of the potential tax bill if they decide to use any part of their home exclusively for the purposes of a trade, business or profession.
To discuss this or any other property related matter, contact us.