Charles de Lastic, Managing Director of Bluebond Financial Planning, discusses this particular relief and why you may need tax help.

Working from home is growing in popularity, both for the self-employed and employed workers.  If you fall into either of these groups, have you considered if it could affect your Capital Gains Tax (CGT) private residence relief when you come to sell your home?  Some tax help may be beneficial.

What is private residence relief?

Private residence relief is one of the best know tax reliefs.  It allows a person to sell their main home without triggering a liability to CGT.  When someone owns more than one residential property, you can choose which one is the main residence for the purposes of the relief.  It does not have to be the one in which you spend most time in and you can change which property is regarded as your main residence, although only one can be the main residence at any one time.  Seek professional tax help and advice if you are unsure how to go about this, or to establish if it will benefit you.  Relief from CGT is given on the sale or disposal of all or part of a qualifying property.

Are there any drawbacks to the relief?

Private residence relief is not available for any part of the property that is used exclusively for business purposes.  Therefore, where there is exclusive business use, any gain on the sale of the property must be allocated and the proportion on the area relating to exclusive business is subject to tax.  You may wish to seek some tax help to deal with this, but basically, the example below explains:

Example

I could run a graphic design business from home and my house has seven rooms and I use one exclusively as an office.  On the sale of my property, I receive a gain of £40,000.  One seventh (£5714) of that will be subject to CGT.  As my annual exemption (£10,100 for 2010/11) remains available, the gain will be sheltered and the result is that no CGT is payable.

The same applies for people who are employed workers but work from home and set aside a dedicated area exclusively for work.

What advise will seeking tax help give me if I were to go over my exemption?

Relief is only lost where there is exclusive business use of part of the property.  To protect the exemption, all that is necessary is to ensure that any part of the home that is used for business purposes is also available for private use.  For example, a room used as an office during the day could also be used by the taxpayer’s children to do their homework in the evening.

By making rooms used for business purposes also available for domestic use, it is possible to work from home and ensure that private residence relief remains available for the whole property.

What other tax issues should be borne in mind?

Non-exclusive business is a ‘good thing’ for protecting the full entitlement to private residence relief; however, the same cannot be said for income tax.  When receiving tax help, it should be explained to you that relief for expenses is available to taxpayers when they are incurred wholly and exclusively in relation to that business.  Where a room is used exclusively for business, a greater deduction is permitted.  Where the use is non-exclusive, the permitted deduction is reduced as costs must be allocated between business and domestic use.

In summary

If part of the property is used exclusively for business, all is not lost from a CGT perspective.  Depending on the amount of any gain in relation to the business part, it may be possible to shelter the gain with the annual CGT exemption.  This makes it possible to use part of your house exclusively for business and to sell the house without paying any CGT, while enjoying the maximum possible deduction for expenses in the process.

As with all these things, circumstances are different for all individuals and it is therefore essential that you should seek tax help and advice from a professional.

Do you need tax help?

If you are wondering if any of the issues raised above affect you, you should seek tax help from an experienced independent financial adviser.  You can contact Bluebond Financial Planning via our website for Finacial Advice in St Albans .  We will be happy to hear from you.