06 December 2000
Business use of home
A psychotherapist client lives alone in a four storey house. The house has six rooms, excluding kitchen and bathrooms, of which four are used for business as follows:
2nd floor: therapy room — 70 per cent business use (occasional weekend use as spare bedroom)
2nd floor: group room — 90 per cent business use (occasional use for meetings when a larger space is required, but a negligible amount of personal use — e.g. Christmas)
1st floor: two rooms — no business use
Ground floor: office — 90 per cent business use (occasional personal use)
A psychotherapist client lives alone in a four storey house. The house has six rooms, excluding kitchen and bathrooms, of which four are used for business as follows:
2nd floor: therapy room — 70 per cent business use (occasional weekend use as spare bedroom)
2nd floor: group room — 90 per cent business use (occasional use for meetings when a larger space is required, but a negligible amount of personal use — e.g. Christmas)
1st floor: two rooms — no business use
Ground floor: office — 90 per cent business use (occasional personal use)
Business use of home
A psychotherapist client lives alone in a four storey house. The house has six rooms, excluding kitchen and bathrooms, of which four are used for business as follows:
2nd floor: therapy room — 70 per cent business use (occasional weekend use as spare bedroom)
2nd floor: group room — 90 per cent business use (occasional use for meetings when a larger space is required, but a negligible amount of personal use — e.g. Christmas)
1st floor: two rooms — no business use
Ground floor: office — 90 per cent business use (occasional personal use)
Ground floor: sitting room — 10 per cent business use (disabled access necessitates occasional use of this ground floor room)
Basement: kitchen — no business use.
The query concerns three points:
(1) The spread and overlap of business and personal use makes the spatial apportionment quite complex; would it be correct to base the use of home claim on the proportional use of 2.6 rooms out of 6 = 43 per cent of council tax, water rates, light and heat, insurance?
(2) Non-exclusive business use of the house normally means that capital gains tax exemption is not jeopardised; would this still be the case if the above claim were made?
(3) This year money was spent on an extensive refurbishment/redecoration of the front of the house and also internally.
Would it be acceptable to claim any proportion of these interior and exterior refurbishments?
(Query T15,721) — Paul.
Many people, both employees and self employed, dedicate space or facilities in their homes to the process of earning a living. The accommodation can be the base of outworking, or a sole trade, partnership, or company, and it can be used for the benefit of an employer.
Premises
To compute the domestic overhead rechargeable as office or workroom facilities:
* Count the rooms; ignore separate toilets and passages, unless the 'passage' is another room.
* If one room (a lounge?) is clearly double size, count it as two rooms.
* A garage equates one room for each large car, with all doors open, that it can hold.
* A conservatory calls for judgment; if double glazed and used as a room all year, count it, but if it leaks, demands warm clothes in winter, or is remote from heating, it is best ignored.
* A hall, gallery or other area sometimes used as a room (e.g. for parties) should be judged on the facts.
* Total the rated services, council tax, rent, ground rent, insurance and maintenance expenses.
* Deduct the proportion relating to (the number of rooms represented by) any garage.
* To the balance add light and heat, less any amount specifically charged to business (see below), and divide the total by the number of rooms in the house proper.
Office or workroom facilities are then computed according to the number of rooms, or fractions of rooms, involved, depending on the facts. Upkeep apportioned to a garage is part of motor expenses, which may also need to be split between trade and private use, unless the garage is also (or only) a materials or equipment store, making it wholly a trade expense.
While trade activity or record keeping takes less than 24 hours a day, where business property, such as furniture, equipment, files, etc., is stored in a room, the storage function continues round the clock. This should be borne in mind when allocating the percentage of use. For example, the area used as an office or a suitably equipped workshop would be 100 per cent business.
Power and light
The domestic electricity bill will include the cost of running purely business equipment, such as desk lamps, computers, printers, copiers, scanners, facsimile units, power tools, answerphones, etc. which should be recharged to the business, on the basis of the number of units used. Unless separately metered, usage can be computed from the kilowatt rating of each item and the number of hours which it is expected to be used in a quarter, or other relevant period.
Capital allowances
These are claimable on all furniture, equipment and tools owned by the taxpayer and used for business, whether bought or appropriated from the home, e.g. cupboards, tables, chairs, desks, shelving, drawers, etc. In view of the hard wear on furniture (except, perhaps, shelving and the more solid tables) and of the equally rapid obsolescence of electronic hardware, it makes sense to elect to treat the items as short life assets.
Interest
Interest on a loan to buy a business asset is a deductible trade expense. This also applied to ad hoc business, such as buying an investment property to let, and even when a residence is briefly let as an investment property, e.g. when the owner is temporarily away. When home space is used for trade, a business space area portion of mortgage interest, if any, is similarly allowable.
Capital gains tax
Except in rented property, never let a room be used exclusively for trade, or part of the principal private residence capital gains tax exemption will be lost. Any private use, such as storage of personal chattels, negates business exclusivity for capital gains tax purposes.
As to the numbered points:
(1) The allocation is logical, and appears quite reasonable, but do not overlook the storage aspect, mentioned above. In particular, the office should be listed at 100 per cent on that score.
(2) Provided the actual use or the contents of a room include a private element, trade use is not exclusive and the principal private residence exemption is intact.
(3) As indicated above, maintenance is part of property upkeep and, thus, part of the overhead to apportion. This includes repairs, redecoration, keeping the surrounding garden tidy, maintaining paths and paved approaches, cleaners' wages, cleaning materials, providing and maintaining cleaning equipment, and it applies to the whole property, not just the trade area. — Man of Kent.
In answer to the points raised:
(1) An overall percentage claim is acceptable, but should be apportioned between the various rooms taking account of both the proportion of business use and the area they occupy as a proportion of the whole property (including the kitchen and bathroom, but excluding any land/gardens attached to the property). This means the percentage is likely to be lower than the 43 per cent shown. The client should be asked each year to complete an expenses claim form including details of the proportion of business use for each room, to ensure his tax return is correctly completed.
(2) Provided that none of the property is used 100 per cent for business, the expenses claim made will not affect principal private residence relief in any way.
(3) A claim may be possible subject to the following restrictions:
* Nothing should be claimed in respect of the work on the exterior of the property ('duality of purpose' between business and private use makes this disallowable) or any areas where there was no business use.
* In respect of the rooms where some business use occurred, a proportionate claim (relative to the level of business use) may be made in respect of any work which constitutes repairs rather than improvements to the property. 'Paul' should ask the client for all the invoices for the refurbishment/redecoration if there is any doubt as to the classification of part of these expenses. — Bartholomew.
Editorial note. The impact of self assessment should not be overlooked. The purpose of the 'business use of home' calculations is to justify the figures included in the accounts and accounts information part of the tax return.
'Bartholomew' is of course correct in submitting that this tiresome calculation should be made each year.
Unless the Inland Revenue initiates an 'aspect' enquiry, the claim may well go through 'on the nod'. But beware of discovery and adjustment for the previous six years where an unjustifiable amount has been claimed.
Many practitioners take the view that council tax should be excluded from the apportionment of overheads as no part can be said to relate exclusively to business use, whilst others consider that this should be treated the same as all the other overheads.
A psychotherapist client lives alone in a four storey house. The house has six rooms, excluding kitchen and bathrooms, of which four are used for business as follows:
2nd floor: therapy room — 70 per cent business use (occasional weekend use as spare bedroom)
2nd floor: group room — 90 per cent business use (occasional use for meetings when a larger space is required, but a negligible amount of personal use — e.g. Christmas)
1st floor: two rooms — no business use
Ground floor: office — 90 per cent business use (occasional personal use)
Ground floor: sitting room — 10 per cent business use (disabled access necessitates occasional use of this ground floor room)
Basement: kitchen — no business use.
The query concerns three points:
(1) The spread and overlap of business and personal use makes the spatial apportionment quite complex; would it be correct to base the use of home claim on the proportional use of 2.6 rooms out of 6 = 43 per cent of council tax, water rates, light and heat, insurance?
(2) Non-exclusive business use of the house normally means that capital gains tax exemption is not jeopardised; would this still be the case if the above claim were made?
(3) This year money was spent on an extensive refurbishment/redecoration of the front of the house and also internally.
Would it be acceptable to claim any proportion of these interior and exterior refurbishments?
(Query T15,721) — Paul.
Many people, both employees and self employed, dedicate space or facilities in their homes to the process of earning a living. The accommodation can be the base of outworking, or a sole trade, partnership, or company, and it can be used for the benefit of an employer.
Premises
To compute the domestic overhead rechargeable as office or workroom facilities:
* Count the rooms; ignore separate toilets and passages, unless the 'passage' is another room.
* If one room (a lounge?) is clearly double size, count it as two rooms.
* A garage equates one room for each large car, with all doors open, that it can hold.
* A conservatory calls for judgment; if double glazed and used as a room all year, count it, but if it leaks, demands warm clothes in winter, or is remote from heating, it is best ignored.
* A hall, gallery or other area sometimes used as a room (e.g. for parties) should be judged on the facts.
* Total the rated services, council tax, rent, ground rent, insurance and maintenance expenses.
* Deduct the proportion relating to (the number of rooms represented by) any garage.
* To the balance add light and heat, less any amount specifically charged to business (see below), and divide the total by the number of rooms in the house proper.
Office or workroom facilities are then computed according to the number of rooms, or fractions of rooms, involved, depending on the facts. Upkeep apportioned to a garage is part of motor expenses, which may also need to be split between trade and private use, unless the garage is also (or only) a materials or equipment store, making it wholly a trade expense.
While trade activity or record keeping takes less than 24 hours a day, where business property, such as furniture, equipment, files, etc., is stored in a room, the storage function continues round the clock. This should be borne in mind when allocating the percentage of use. For example, the area used as an office or a suitably equipped workshop would be 100 per cent business.
Power and light
The domestic electricity bill will include the cost of running purely business equipment, such as desk lamps, computers, printers, copiers, scanners, facsimile units, power tools, answerphones, etc. which should be recharged to the business, on the basis of the number of units used. Unless separately metered, usage can be computed from the kilowatt rating of each item and the number of hours which it is expected to be used in a quarter, or other relevant period.
Capital allowances
These are claimable on all furniture, equipment and tools owned by the taxpayer and used for business, whether bought or appropriated from the home, e.g. cupboards, tables, chairs, desks, shelving, drawers, etc. In view of the hard wear on furniture (except, perhaps, shelving and the more solid tables) and of the equally rapid obsolescence of electronic hardware, it makes sense to elect to treat the items as short life assets.
Interest
Interest on a loan to buy a business asset is a deductible trade expense. This also applied to ad hoc business, such as buying an investment property to let, and even when a residence is briefly let as an investment property, e.g. when the owner is temporarily away. When home space is used for trade, a business space area portion of mortgage interest, if any, is similarly allowable.
Capital gains tax
Except in rented property, never let a room be used exclusively for trade, or part of the principal private residence capital gains tax exemption will be lost. Any private use, such as storage of personal chattels, negates business exclusivity for capital gains tax purposes.
As to the numbered points:
(1) The allocation is logical, and appears quite reasonable, but do not overlook the storage aspect, mentioned above. In particular, the office should be listed at 100 per cent on that score.
(2) Provided the actual use or the contents of a room include a private element, trade use is not exclusive and the principal private residence exemption is intact.
(3) As indicated above, maintenance is part of property upkeep and, thus, part of the overhead to apportion. This includes repairs, redecoration, keeping the surrounding garden tidy, maintaining paths and paved approaches, cleaners' wages, cleaning materials, providing and maintaining cleaning equipment, and it applies to the whole property, not just the trade area. — Man of Kent.
In answer to the points raised:
(1) An overall percentage claim is acceptable, but should be apportioned between the various rooms taking account of both the proportion of business use and the area they occupy as a proportion of the whole property (including the kitchen and bathroom, but excluding any land/gardens attached to the property). This means the percentage is likely to be lower than the 43 per cent shown. The client should be asked each year to complete an expenses claim form including details of the proportion of business use for each room, to ensure his tax return is correctly completed.
(2) Provided that none of the property is used 100 per cent for business, the expenses claim made will not affect principal private residence relief in any way.
(3) A claim may be possible subject to the following restrictions:
* Nothing should be claimed in respect of the work on the exterior of the property ('duality of purpose' between business and private use makes this disallowable) or any areas where there was no business use.
* In respect of the rooms where some business use occurred, a proportionate claim (relative to the level of business use) may be made in respect of any work which constitutes repairs rather than improvements to the property. 'Paul' should ask the client for all the invoices for the refurbishment/redecoration if there is any doubt as to the classification of part of these expenses. — Bartholomew.
Editorial note. The impact of self assessment should not be overlooked. The purpose of the 'business use of home' calculations is to justify the figures included in the accounts and accounts information part of the tax return.
'Bartholomew' is of course correct in submitting that this tiresome calculation should be made each year.
Unless the Inland Revenue initiates an 'aspect' enquiry, the claim may well go through 'on the nod'. But beware of discovery and adjustment for the previous six years where an unjustifiable amount has been claimed.
Many practitioners take the view that council tax should be excluded from the apportionment of overheads as no part can be said to relate exclusively to business use, whilst others consider that this should be treated the same as all the other overheads.
