The Wire: Winter 2020 – Why your new home office could see you landed with a tax bill when you move

(Estimated read time 4 minutes)

Why your new home office could see you landed with a tax bill when you move

If the events of recent months have led you to think about moving home, you’re not alone. Changes to the ways we live and work mean that the preferences of house buyers have shifted, with gardens and home offices the current ‘must-haves’ for buyers.

Sam Butler of Cotswolds-based estate agent, Butler Sherborn, recently told Country Life: “Buyers from cities including London want to find somewhere in the countryside, particularly in and around the Cotswolds and Oxfordshire.

“They are looking for space, somewhere suitable for working from home, fresh air for a healthier lifestyle and access to good schools in the case of young families.”

This Is Money reported that, while only 5% of employees worked permanently at home before the pandemic, around a quarter of people will be working from home on any given day in future. 

So, it’s perhaps no surprise that a ‘home office’ is the new ‘conservatory’ or ‘off-street parking’.

However, accountants are warning workers they are taking a risk in creating a dedicated home office, because HMRC may view their new workspace as a business premise, rather than a place of leisure.

Why Capital Gains Tax could be due when you sell your home

When you sell your main home, you don’t have to pay any Capital Gains Tax (CGT). However, it may be levied on any part of your residence used ‘exclusively for the purposes of a trade, business, profession or vocation’.

In practice, it means the rising number of home offices could land workers with an unexpected tax bill – if such an office is used exclusively for business purposes.

So, if you’ve built a ‘study shed’, or if you’ve followed former PM David Cameron’s lead of constructing a ‘shepherd’s hut’ in the garden, you could face a CGT bill when you come to sell your home. 

Even if you have converted a room in your home into an office, if it’s exclusively for your business use and is a ‘no children’ zone – perhaps you even have a lock on the door – then HMRC may consider this liable for CGT.

For example, say that you have a home office, and this office takes up 10% of the total area of the house. When the house is sold and generates a gain of £200,000, 10% of the gain would be liable for Capital Gains Tax.

George Bull, a partner at the accountancy firm RSM, told the Sunday Times: “If you set aside a room and say: ‘This is my study, I have a phone in there, a computer in there and I’m keeping it locked from the children’, that is going to crystallise a tax exposure.”

If you want to avoid a potential CGT liability on the sale of your home, make sure that the room is used for other purposes as well as working. Again, take the lead of David Cameron, who said that, while he planned to write his memoirs in his £25,000 shepherd’s hut, his children wanted to use it as a Wendy house and ‘alternative bedroom’.

Under the current HMRC rules, a room or shed will only be taxed if it has ‘exclusive’ work use. So, using it as a spare bedroom, adding a sofa or exercise bike, or allowing your children to play in there could help you avoid any tax problems in the future.

However, Marc Selby, the head of tax at Laytons solicitors, advises that honesty is the best policy. “If, in fact, it is used exclusively as an office, then you should expect to be taxed as such,” he said. “The eyes of the taxman are wide open.”

Treasury currently undertaking review of CGT

Of course, it’s worth considering this issue in the wider context of the review of CGT that is currently under way in relation to individuals and smaller businesses. Earlier this summer, the Treasury asked the Office of Tax Simplification to consider the overall scope of the tax and the rates which apply.

The review will also look at the reliefs, exemptions and allowances which apply, and this has led some experts to claim that the Chancellor could be set to end private residence relief.

Until then, HMRC described talk of a tax grab as ‘scaremongering’, adding: “In the vast majority of circumstances, most people working from a room at home will use that room for both work and domestic purposes to some sort of degree.”

Print Friendly, PDF & Email