Working from a home office to run a property business is a popular option for thousands of landlords, but many are underclaiming expenses in fear of triggering a capital gains tax bill.
The worry is that turning over part of your home to business marks that part of the property for business use which is taxed when you sell.
HM Revenue & Customs lets any landlord working from home claim an annual tax allowance of £208 a year or £4 a week without any proof of expenditure and without looking for any capital gains tax down the line.
HMRC guidance says that when claiming up to £4 a week, you don’t need to provide any records of household expenses to support the relief.
For claims above £4.00, you will need supporting evidence, like bills and receipts, to show that the amount claimed is no more than the additional household expenses you have actually incurred by working from home.
When claiming a higher amount, do not specify a certain room is exclusively used for business, but claim for a percentage of using various rooms - like two hours a day for a bedroom to do the accounts and marketing, or few hours a week for meetings in the living or dining room. and some space in the garage for storage.
This claim is called apportionment. Like Professor Stephen Hawking, HMRC has a formula for apportioning time and space as a percentage of household costs.
For example, if your office is used six hours a day, five days a week, that is using that room for 30 hours out of an available 168 (24 x 7), that’s 17.85% of the week.
If that office takes up 12.5% of the floorspace of the house and your home insurance is £450 a year, then that room is responsible for 12.5% of £450 = £56.25 of the cost.
As the room is used for 17.85% of the week, then that’s 17.85% of £56.25 = £10.04.
So, via that formula, the home insurance cost apportioned for your property business is £10.04 per year.
Work out other costs in the same way, like phone, utilities, council tax, repairs and maintenance.
Add them together, put the bills and your workings to one side in case the tax man asks for proof of how you arrived at the claim, then out the total figure in to the property pages of your tax return as ‘Other expenses’ and deduct the amount from profits to reduce the tax you pay.
